The overall non-performing loan (NPL) ratio won't exceed 10 percent by 2012, and won't cause systematic risks to China's banking sector, according to a Standard & Poor's (S&P) press teleconference held Thursday.

The NPL ratio will be 3 to 4 percent by end of this year, and is unlikely to go beyond 10 percent by 2012, said Ryan Tsang, senior director of Financial Institution Ratings with S&P.

The overall NPLs amounted to 454.91 billion yuan ($67.09 billion) with the NPL ratio at 1.3 percent in the first half of the year, down 0.28 percentage points since earlier in the year, according to the China Banking Regulatory Commission's statement Thursday.

It doesn't mean that major banks will report a substantial increase of the NPL ratio in the second half of the year, because smaller banks with weaker asset qualities may pose a higher NPL ratio than large banks, which makes the average NPL ratio at 3 to 4 percent, Tsang noted.

The major source of risks will come from the local government funding vehicles (LGFVs), Tang said.

Loans to LGFVs accounted for 25 percent of all lending in 2009, and the quality of many of the projects was weak rather than commercially viable because most of them were stimulus efforts, he said.

Many LGFVs will turn into NPLs, he said. Assuming 30 percent of LGFVs become NPLs, that will be about $400 billion, adding 4 to 6 percentage points on the NPL ratio.

The property sector is another major area that could produce NPLs, but with less pressure than LGFVs.

Tsang didn't specify the volume of property level NPLs.

"However, the banking sector has ways of solving and digesting the NPLs. The level of pressure is unlikely to cause a crisis," Tsang said.

But the impact of this asset quality pressure is unevenly distributed in China.

Large banks such as State-owned and joint banks will be much better off than city and rural commercial banks due to larger profits and increased bargaining power with the local governments for better infrastructure projects, which means fewer NPLs, Tsang said.

NPLs of small banks could be very high, he predicted.

"There were about 20,000 financial institutions operating in China three years ago, today there are fewer than 4,000. The number decreased by 80 percent in three years and we believe the consolidation will continue," said Tsang.