The Industrial and Commercial Bank of China (ICBC), believed to be the world's largest bank by assets, said its non-performing loan ratio rose to 1.66 per cent at the end of March, up from 1.50 per cent at the end of last year.
Its first-quarter net profits rose just 0.59 per cent year-on-year to 74.76 billion yuan (USD 11.51 billion), according to a statement to the Hong Kong stock exchange.
China is considering both converting non-performing loans into equity, and repackaging bad loans into securities which could then be sold, according to media reports which have not been confirmed by the government.
"Unless they are carefully designed and part of a sound overall framework, they could actually worsen the problem," they said, adding one issue was allowing so-called "zombie" companies to survive.
China's "Big Four" banks are scheduled to report first quarter results this week.
The Bank of China, the main foreign exchange bank, said Tuesday that it had non-performing loans of 135.83 billion yuan at the end of March, accounting for 1.43 per cent of the total -- steady from the end of 2015.
The IMF posting said that to tackle bad loans, China should shut down distressed firms and require banks to be more proactive.
"To help address the systemic problem of excessive corporate debt and impaired bank loans more generally, they need to be part of a comprehensive, system-wide plan," it said.