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People's Daily Online>>China Business

Banks ordered to raise loan loss reserves

(Xinhua)

13:31, April 19, 2012

Chinese financial institutions have been required by authorities to turn in more provisions to cover possible rises in loan impairment amid a slowdown in the world's second-largest economy.

In a move to tighten the banking sector's risk prevention and control, the Ministry of Finance (MOF) ordered financial enterprises to keep 1.5 percent of their gross loans as general provisions beginning in July this year, up from the existing 1 percent.

The new "dynamic provision" rules will apply to policy banks, commercial banks, financial companies, urban and rural credit cooperatives, lease financing companies and financial asset management firms, as well as smaller town- and village-based banks.

To ensure a smooth transition, financial enterprises will be given a grace period of five years to meet the new regulatory standard.

Under the existing rules, financial asset management firms and small town- and village-based banks are not subject to the regulation in this regard.

The new rules aim to "boost the banking sector's ability to guard against risks" and make financial enterprises' reserves for loan losses "more predictable" and better reflect changes in the economy, the MOF said in a statement on its website.

In calculating potential risky asset value, the MOF also raised the weighting of sub-prime loans from 25 percent to 30 percent, while setting the weighting for suspicious loans at 60 percent and losses at 100 percent.

China categorizes bank loans into five-levels -- normal, monitored, sub-prime, suspicious loans and losses. Sub-prime, suspicious loans and losses are usually considered to be bad loans.

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