The bad-loan ratio rose 8 basis points from the start of the year to 2.1% as of end-June, while non-performing loans are expected to increase, the China Banking and Insurance Regulatory Commission said in a statement Saturday.

Some small and medium-sized financial institutions are facing deteriorating asset quality and accumulated risks, it said. Capital has been funneled into the housing and stock markets, in violation of regulations and causing asset bubbles, the CBIRC said.

Banks can book interest income when it is due even though the actual repayments were delayed, under current rules, a CBIRC official told Bloomberg News in June. This hasn’t been reflected in banks’ profits and there will be a lag in the risk exposure until later this year or next year, the official said.

The CBIRC on Saturday urged lenders to prepare a response to a sharp rebound in non-performing loans even though they aren’t fully exposed yet. Banks are encouraged to boost profit retention to accumulate capital, while appropriately reducing or limiting bonuses, the CBIRC said.

Banks face a combined shortfall of at least 350 billion yuan ($50 billion) in bad-loan provisions to meet a minimum regulatory requirement, the regulator said. The CBIRC said it will also push the implementation of the latest policy of provincial governments’ special bonds issuance.