Liaoning Asset will fund the purchase of assets by issuing special-purpose notes to the bank, the lender said.

The bank, based in the northeastern Chinese city of Shenyang, expects an unaudited provision for impairment of about 7.7 billion yuan, it said, adding that the deal will improve its asset quality and lower non-performing loan ratio.

Liaoning Asset, which focuses on transactions of non-performing assets of financial institutions, is a unit of Liaoning Financial Holding owned by the finance authority in the Chinese province of Liaoning, where Shengjing Bank is based.

Last month, Shengjing Bank reported a 21.8% drop in its net profit attributable for half-year to 737.9 million yuan. Its net interest income for six months slipped 1.3% to 15.32 billion yuan.

Its net interest margin - a key gauge of profitability - stood at 1.22% in the Jan-June period, versus 1.30% a year ago, according to its half-yearly report.

($1 = 7.3105 Chinese yuan renminbi)

(Reporting by Echha Jain in Bengaluru; Editing by Arun Koyyur)