The extent to which China's support for unsecured retail lending could boost loan demand or alleviate pressure on banks' net interest margins (NIM) has yet to be known, Fitch Ratings said in a Thursday release.

China's consumption package includes an interest subsidy of up to one percentage point on new qualified consumption loans, as a way to amplify unsecured retail lending.

The slowdown in unsecured retail lending growth to 6% in 2024 stems from property market weakness and a dampened income outlook, Fitch said.

The system also saw declining asset quality figures, with the six-month past-due ratio for credit cards increasing to 1.4% by end-2024.

Meanwhile, sector-level NIM fell to 1.4% in the second quarter of 2025.

Still, Fitch expects the deterioration in asset quality for rated banks to only be moderate, as stricter underwriting standards and a high household saving rate offset some mid-tier banks' sizable exposure to unsecured retail lending.

Meanwhile, the rating agency also warns of downside risks for Chinese banks from the potential misuse of consumption loan proceeds for speculative purposes or subdued household affordability.