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Unformatted text preview: na’s financial depth grew significantly from 117 percent of GDP in
1994 to 221 percent of GDP6 in 2004. 研 究 所 年 報 134 III.�Evolution�of�Non-performing�Loan�in�China
Chinese Banks traditionally adopt the 4-category system to classify loans as pass, pastdue, idle and loss. As of 2004, China’s wholly state-owned commercial banks (SOCBs) and joint
shareholding commercial banks (JSCBs) started to adopt the international 5-category loan
classification system. The 5-category system categorizes 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 serve their loans are in
question. Borrowers cannot depend on their normal business revenues to pay back the principal
and interest so losses may 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
be recovered or only a small portion can be recovered after taking all possible measures and
resorting to necessary legal procedures.
The difference between the two systems seems to be that more subjective judgment is involved
in the internationally applied 5-category system than in China’s 4-category system, which points
to a more prudent and forward-looking approach for international banks than for Chinese banks.
The difference as to the definition of NPLs between the two systems lies in that in the 4-category
system the loans overdue on principal payment for 1 day are classified as non-performing, while in
the 5-category system the non-performing relates to the interest payment, but with an allowance
for 90 days. The latter also involves credit officer’s judgement of borrower’s financial position. So
the two definitions do not seem to match with each other, and thus it is difficult to compare the
sizes of the NPLs measured under the two systems. While it seems to be a common belief that the
NPLs size with China’s definition is less than that with international definition, how much it is
less is difficult to estimate. Evolution�of�NPLs�in�China
Since almost all of NPLs is generated by SOCBs, the discussion below focuses on NPLs of 6 Mckinsey Global Institute (2006). Non-Performing Loan of China’s Banking System 135 SOCBs. As Chinese government never officially published the size of NPLs before 2003, we could
only use the data estimated by previous literatures.
The evolution of NPL...
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This document was uploaded on 03/12/2014.
- Spring '14