Some of the bad loans chinese banks are burdened with

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Unformatted text preview: ;Some of the bad loans Chinese banks are burdened with are incurred by a lack of credit information about borrowers," according to China Daily's article "Credit Culture Comes to China" published in April 28, 2001". Chinese banks did not realized the importance of a credit rating system until recently. "China desperately needs a credit culture," Wang Xuebing, former 16 17 Credit Risk Emphasized, 09/01, Xinhua News Agency Credit Culture Comes to China, 04/01, China Daily President of the BOC, said in early 2001 at a business forum, "the government needs to make special efforts to educate society about the credit culture."' 8 Underdeveloped Institutional Infrastructure A financial system can only function efficiently in a clear framework of contract law and predictable law enforcement. Bankruptcy provisions are particularly important. Also vital are appropriate and transparent accounting conventions; adequate transparency and disclosure; strong payment and settlement systems; and appraisal techniques. The legal and business infrastructure is still under development in China. Before a sound institutional infrastructure is available in China, many problems including loan default are inevitable. 18 Credit Culture Comes to China, 04/01, China Daily CHAPTER FOUR: NON-PERFORMING LOANS IN CHINA Definition of NPLs in China's Banking System Due to the ambiguous definition of non-performing loan and the lack of transparency in China's banking system, the total amount of NPL has always been a doubtful number. Before 1994, the People's Bank had an informal loan classification system, that is, the SOBs could classify no more than 2% of all their loans as "bad debt", meaning the volume of loans not recoverable from the proceeds from bankruptcy and liquidation; no more than 5% as "problem loans," meaning loans more than three years past due with interests still being paid; and a maximum of 8%as "of concern," meaning borrowers were more than one year behind on principal repayments 9 . The lenient definition and artificially fixed bad loan quota buried the true picture of the NPL problem in China's banking system. In 1995, the People's Bank formally set forth a new loan classification system. The new system is a three-tier scheme. The first tier is the "past due loans", which includes loans not repaid when due or not repaid after the due date has been extended. The next tier is the "doubtful loans", which are loans that have been past due two years or more or loans that have been extended to borrowers who have suspended production or whose projects are no longer being developed. The third tier is the "bad debts", which are loans that have not been repaid after borrowers have been declared bankrupt and gone through liquidations 20 Investors Service, Effects of Recent Reforms on Credit Quality of China's Specialized Banks, p.9 People's bank of China, General Rules on Loans, Chapter 7, article 33-37 19 Moodys 20 Even though the new definition is much stricter than the old one, it is still too lenient comparing to the standard international practice, in which commercial loans 90 days pa...
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This document was uploaded on 03/12/2014.

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