April 30, 2019

CBIRC launched a consultation on the draft interim measures for the classification of financial asset risks of commercial banks in China. The comment period for this consultation ends on May 31, 2019. The Interim Measures extend the risk classification from loans to all financial assets that bear credit risk and propose non-credit assets with credit impairment as the core classification requirement, especially for the classification of asset management products.

Compared with the current "Guidelines" on asset risk classification, the "Interim Measures" expand the scope of asset risk classification, propose a new core definition of risk classification, emphasize the debtor-centered classification concept, clearly define the number of overdue days as an objective indicator of risk classification, and provide risk classification requirements for restructuring assets. Additionally, the "Interim Measures" put forward systematic requirements for commercial banks to strengthen risk classification management and clarify the relevant requirements for supervision and management. 

As per the new measures, commercial banks are required to improve the risk classification governance structure, formulate risk classification management systems, clarify classification methods, processes and frequencies, develop and improve information systems, and strengthen monitoring and analysis, information disclosure, and document managementAfter the implementation of the Interim Measures, claims overdue for more than 90 days, even if the mortgage guarantee is sufficient, should be classified as bad. Considering the severity of the risks reflected by the non-retail debtor overdue for more than 90 days, the bank should categorize its debt as bad if the debtor’s debt overdue for more than 90 days in all banks’ debts has exceeded 5%. In addition, if loans are overdue for more than 270 days, they should be classified as at least suspicious. If overdue for more than 360 days, they should be classified as loss. 

As per the CBIRC notification, credit risk is the most important risk faced by the banking industry in China and a sound risk classification system is the prerequisite for effective prevention and control of credit risk. These measures replace the existing guidelines on this topic while drawing on the latest international requirements and keeping in mind the domestic regulatory practices. These measures are also cognizant of the BCBS guidelines, from 2017, for careful handling of assets (Definitions of Adverse Exposure and Regulatory Tolerance); these BCBS guidelines clarified the criteria and classification requirements for non-performing assets and restructured assets to enhance the consistency of the global banking asset risk classification criteria.

 

Related Links (in Chinese)

Comment Due Date: May 31, 2019

Keywords: Asia Pacific, China, Banking, Credit Risk, NPLs, Interim Measures, Classification of Impairments, 90 Days Overdue, Asset Risk Classification, CBIRC

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