Banks to Adopt five-category Loan Classification System in 2004

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Last updated at: (Beijing Time) Saturday, September 06, 2003

Banks to Adopt five-category Loan Classification System in 2004

China's wholly state-owned commercial banks (SCB) and joint shareholding commercial banks (JSCB) will adopt the international five-category loan classification system as of 2004.

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China's wholly state-owned commercial banks (SCB) and joint shareholding commercial banks (JSCB) will adopt the international five-category loan classification system as of 2004.

Sources with the China Banking Regulatory Commission (CBRC) said Friday that the existing parallel four-category loan classification system will be phased out by that time.

The five-category system classifies bank loans according to their inherent risks as pass, special-mention, substandard, doubtful and loss.

"Pass" indicates that borrowers are able to honor the terms of the contracts and there is no reason to doubt their ability to repay the principal and interest of loans in full and in a timely manner.

"Special-mention" means that borrowers are able to serve their loans currently, although repayment may be adversely affected by specific factors.

"Substandard" means that borrowers' abilities to service their loans are in question. Borrowers cannot depend on their normal business revenues to pay back the principal and interest so lossesmay ensue, even when guarantees are invoked.

"Doubtful" indicates that borrowers cannot pay back the principal and interest in full and significant losses will be incurred, even when guarantees are invoked.

"Loss" means that the principal and interest of loans cannot berecovered or only a small portion can be recovered after taking all possible measures and resorting to necessary legal procedures.

The current four-category system categorizes loans as pass, past-due, idle and loss.

Some banks in the southern province of Guangdong took the lead in China to implement the five-category loan classification systemin 1999.

The SCBs and JSCBs' non-performing assets have decreased considerably over recent years, and their financial performance has improved. For many reasons, however, these banks still have many significant problems and deficiencies in management, internalcontrols and asset quality, the CBRC authorities said.

In particular, the state-owned commercial banks carry a large amount of problem loans as a result of the past performance. Therefore it is an enormous challenge to mitigate the risks, they said.

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