After ten years of hard work, quality China banking loan has been greatly improved, has reached a relatively good level, large-scale disposal of problem loans basic period ended, and with the increase of bank risk management level and social credit environment improvement, default loans continued to decline, deterioration, loan amount every year deterioration rate are reduced. In this case, how to understand and control the non-performing loans, management of bank credit assets quality, has become a new problem that people concern.

 

The existing provisions for bad loans

 

The World Bank2003Years of loan classification and provisioning group announced the national liaison to the Basel core principles of a provision for the practice of investigation report, which mentioned, a term used in many loan classification system is "bad loans" (NPL), however, the word has different interpretations. In some countries, the non-performing loan refers to the loss of loans, while in other countries, refers to the overdue loans, but over a period of many genius is overdue loans, the great difference. According to the information now available,USA regulatory authorities to secondary, suspicious, loss of three class collectively referred to as the "loan classification" (Classified loans)On this basis, plus, such loans, together referred to as "criticized loans ("Criticized loans).Criticized loans or loan classification mainly for internal bank regulatory authorities and commercial banks, public attention is mainly the non-performing loan (i.e., loan classification).

 

China banking in the credit risk management, used the non-performing loan (NPL) to reflect and evaluate the quality of loans. According to the "loan general clauses" (1996Years) the thirty-fourth stipulation: "the non-performing loan means a dud loans, doubtful loans, overdue loans." The China Banking Regulatory Commission2007Issued "guidelines" provisions of the loan risk classification: "commercial bank loans to major general is divided into normal, attention, substandard, doubtful and loss of five class, three class known as bad loans." And the provisions of "the repayment ability of borrowers appear obvious problems, completely rely on their normal business income is unable to repay the principal and interest of loans in full, even if the collateral, may also cause some loss, should be designated as" subprime "; the borrower cannot repay the loan in full, even if the collateral, great losses will still be caused", be classified as doubtful loan; "after taking all possible measures and all the necessary legal procedures, still unable to recover the principal and interest, or only a small portion can be recovered", to draw for loan losses. The document also stipulates, "the number of days overdue is an important reference index classification. A commercial bank shall strengthen the management on the loan term". And clearly"The following loans shall be classified as sub categories: overdue (including the extension after) over a certain period, the interest receivable not included in the current profits and losses".The China Banking Regulatory Commission in the "rural cooperative financial institutions credit risk classification of assets:" guidelines "in any of the following circumstances into sub categories: general principal or interest overdue?91To180Day loan or imprest for off balance sheet business31To90Day." At the same time, the housing mortgage loans and auto loans, classification standards: "sub categories: the borrower default number of continuous4~6Second, the loan principal or interest on overdue91~180Days; suspicious: the borrower default period amounted to7More than once, the loan principal or interest overdue181More days." The corresponding relationship between the file explicitly given number of days overdue and classification results, but only for the rural cooperative financial institutions.

 

In the "guiding principles for classification of loan risk (for Trial Implementation)" (1998Years4Month) attachment "loan risk classification instructions" for the housing mortgage loans is a reference, i.e."To the housing mortgage loans may refer to the following method to classify: if the loan principal or interest arrears repayment6Or180More days, at least for the secondary; default12Or360More days, at least as loss ";" the credit card overdraft, may refer to the following method to classify: if the loan principal or interest arrears repayment3Or90More days, at least is divided into sub categories; default6Or180More days, at least as loss".

 

The definition of non-performing loans in some normative documents current are given a qualitative principles, in practice, banks are at least the overdue90More days of loans or expected loss of loan principal and interest are designated as bad loans.

 

Because of the difference of banks risk preferences and specific business objectives, how many days will be overdue loans classified as non-performing standard or some difference, as long as it does not exceed the provisions of national principle, each bank has different requirements to delimit the non-performing loan period can be.If the bank agreed in the loan contract or loan agreement, after the expiration of the loan can also have a repayment grace period, a grace period loan is overdue loans; some banks on overdue loans have a tolerance, hope that the borrower can continue to performance in this tolerance period, repayment of principal and interest for loans, no put it in bad loans, if the banks in the personal loans overdue90Days later returned to10Day grace period, and then classified as non-performing loans; some banks regulation is more strict, tolerance for overdue interest loans is very low, such as industrial and Commercial Bank of China from2007Years begin to or overdue interest30Delimit more days of corporate loans as non-performing loans.

 

In the principal and interest of the loan is expected to determine the loss rate, because the person's subjective judgment will be affected by various factors, such as different interests, different understanding of information, will produce different, sometimes also relatively large differences. Rules of the Ministry of finance "financial provisions for bad debts management approach": "financial enterprise may refer to the following proportionate special preparation: concerned about the type of provision for2%; the secondary class of provision for25%; the suspicious kind of provision for50%; loss percentage for100%. Among them, ready to secondary and doubtful assets loss, percentage can float up and down20%." AccordinglyChina banking basic is the expected loss in25Loan% zoned for subprime loans, the expected50Loan losses are classified into% of suspicious loans uncollectible, the expected interest loans classified as loss class loan, and according to this standard are to the provision of specific provisions. Bank internal audit, external supervision, external audit mainly according to the examination of the loan quality classification of deviation.

 

 

Relationship of non-performing loans and loan default

 

Is there a difference between the non-performing loans and loan default, where's the difference, what is the relationship between them, to answer this question, we need to further clarify the meaning of the non-performing loans.

 

Bad loans have two meanings: one is the meaning of the definition of regulation, relatively narrow, also can say is the narrow sense of non-performing loans, such as the representation of the non-performing loans. Two is the bank self definition of non-performing loans, meaning to be broad, from the broad sense, the non-performing loan is corresponding with the good loans, banks will be able to loan quality is divided into two major categories of good and bad.Good loans refers to those borrowers with no default risk and controllable, can withstand higher income and loan; non-performing loan refers to the borrower default or risk loss has been exposed or a lower expected return loan.

 

With the rapid development of Chinese economy, strengthen the business and social credit environment improvement, quality Chinese bank loans also achieved a fundamental turn for the better, now is facing constraints, capital resources include human resources constraints.Banks can only through saving, extensive improve returns on capital from resource to resource transformation, as far as possible to improve operational efficiency. Unit resources, per unit of capital returns will become the bank credit business performance evaluation criteria, the evaluation of loan quality requirements should also be narrow to default loss to more generalized risk efficiency mainly. As long as it is lower than the average return on loans is not good loans; lower than the operating costs of the loan is bad loans. The high income, do not default loans should be the good loans, even if the risk is big, as long as it is expected, that belongs to the controllable risk, acceptable; and those of low income, low risk loans are also not good loans.

 

This kind of loan quality assessment generalized standard also reflects the essential characteristics of banks, bank credit intermediary, financial institutions operating loans, its business purpose is to get profit. The bank in order to obtain high profits, will be at the lowest possible price (interest) to obtain temporary transfer capital owner, and at the best possible price to lend the funds needed to borrowers, in this process, the bank is the spread of income. Such as bank loan proceeds are not up to the expected average profit, will lose competitiveness; even if the business does not cover the cost, then the bank can not continue to operate.

 

Loan default and non default should be relative, is a concept in law category, is the borrower fails to fulfill a contractual and borrowers in the loan contract, the loan obligation responsibility. According to Basel II, the China Banking Regulatory Commission formulated the "commercial bank internal credit risk rating system of the supervisory guidance"Loan default, refers to "(a) overdue90Days or more; (two) commercial banks that, unless we take cash collateral, recourse measures, the debtor may not be repaid in full credit debt." Whether there will be the principal and interest of loan default loss is a kind of expectations, only when the actual disposition, will become a real loss. Although the default loans are not necessarily have the interest loss of loans, are not necessarily no income, and even some default loan proceeds also may be lower than the normal loan does not default, such as able to charge higher interest loan default, but at least not good loans, even though the actual income it may be higher than other normal loans, is also a kind of problem loans. As for the banks, the most important is the principal and interest of the loan can also recover, the borrower defaults increased uncertainty, beyond the expected risk, may cause the loss of loan principal and interest, the final actual no loss is the bank after preservation measures and achieved.In order to strengthen the management of credit risk, in loans, banks will be based on whether the borrower performance, breach of contract if there is interest loss, whether regular quality classification of compensatory preservation measures. The default rate of loans defined in Basel(PD)And default loss rate(LGD)And we said bad loans, non-performing loan ratio is different.The Basel Committee of no use of non-performing loans, but with the default loans, with the loan default rate to replace the non-performing loan ratio, but the loan default is not all losses, which will be lost, so in Basel II and default loss rate, and is close to the non-performing loan loss rate, but we rarely use the loan loss rate of this index.

 

The normal lending and not normal loan is mainly from the borrower will default to the standard to judgeHere, there are two cases:One is the borrower is not default, regardless of whether the loss of interest, loans are normal, default is not normal loan; two is the borrower has no default, such as loan revenue is expected to lower operating costs, the principal will actually be loss, still can be divided into normal loans, but also cannot count is a good loan.

 

Bad loans is corresponding with the good loans, bank is determined according to its own business requirements, although the narrow sense of non-performing loans have definite external supervision standard, have more stringent regulations, more refined and in the bank this standard can also be, but there is no clear regulation on the generalized bad loans.

 

Based on the above analysis, the relationship between the bad loans and loans in default,Loan default is not always the low profit or loss of loans, non-performing loans are not necessarily default loans, but must be low profit or loss of loan interest loans, as long as the expected revenue cannot cover the risk exposure or the cost of the loan, they should be regarded as bad loans.

 

 

Effects of market risk of loan quality

 

We now to the generalized non-performing loans to make further analysis. The borrower to repay the principal and interest according to the agreed contract, may actually have some interest loss of loans, such as fixed rate loans, foreign exchange loans are influenced by interest rate, exchange rate, market risk makes the loan principal and interest loss. Under the existing regulations, this kind of loan does not default, it should be normal loans, should not be included in the non-performing loans. But from the bank credit risk management and business requirements point of view, these loans have the expected loss, should put the hidden problems emerge. Only this kind of no default is expected loss of loan principal and interest classified as non-performing loans, can be more real, fully reflecting the quality of loans, it may cause the management for such loans more attention. This is not only the important content comprehensive credit risk management, credit risk management deepening is a concrete manifestation of.

 

As we know, the credit risk is not a credit risk, credit risk and credit risk are quite different from the meaning of credit risk, credit risk is only part of the risk, operational risk loans are eventually reflected by the customer default, in the default loans or bad loans, have been included in the credit risk and operational risk market risk, but not included, the residual risk this part of the impact of credit on bank loans will become increasingly large, need to pay attention to.

 

In the full market conditions, the bank loan interest rate is mainly determined by market supply and demand, when the market on money supply than demand, the price of capital is low, the bank loan interest rates will be reduced; when the market demand for funds of funds is greater than the supply, prices will rise. At this stage of the domestic bank's profit is determined by the size of the spread, the deposit is the main source of funds Chinese banking, financing costs are known to loan, the key is how to set the interest rate on the loan.

 

Bank loan interest rate = cost of capital and operating costs (expenses, taxes) + risk cost + profit goals

 

The capital cost and operation cost and risk cost = cost of operation

 

Loan interest rates should not only cover the cost of capital, including all the operating costs, but also a reasonable profit, which is the basic principles of loan pricing. The benchmark interest rate loans is equivalent to the average market rate of interest, is covering the whole operation cost and obtain the average profit rate. Because at the same time the capital cost, operating cost is certain, if the loan risk is less than the market average level of risk, so the interest rate can be lower than the benchmark interest rate level, namely preferential interest rates, banks will obtain the average profit. Due to errors in judgment, to the customer's business results have not achieved the expected requirements of customers, or because the banks in the internal management of the business and trade market share as the branches of performance evaluation and assessment requirements, resulting in only the business volume, market trade proportion index, regardless of cost, regardless of return, regardless of resources occupancy, results in the formation of a lot of low income, not income, or even negative income loans, also has a blind competition and other reasons, some not the floating rate loans also fell. This is also a policy restrictions, the lowest interest rates downward float of not more than10%. Once the state released the policy bottom line, the interest rate marketing process, then the bank will be a great test. If a loan interest rates lower than the bank's cost of funds, if do not consider other business income or relevant derived income, it will give the bank losses; such as higher than the cost of capital, lower than the bank operating costs, will also have a loss, but smaller losses; if the loan interest income is lower than the average loan interest income higher than bank management cost, there is no loss, only a small profit.

 

Impact on bank loans greater income is fixed interest rate, some strong customer pricing of bank loans are often put forward higher requirements, not only to lower loan rates, but also to the introduction of fixed rate based on the interest rate to float downward, locking the loan interest rate. The interest rate loans, the market interest rate or Ji Zhun interest rates do not change, the bank can bear, but when interest rates are expected to rise into the channel, the market (Ji Zhun) interest rates continue to rise, can make the bank spreads narrowed, when loan interest rates lower than the average market interest rates, banks will not get the average income. If the number of such loans more, it will affect the bank's return on assets (ROARate of return on capital (,)ROE), have a negative impact on bank market image, market competitiveness; if the fixed rate mortgage loans to banks operating cost, it is just a guaranteed loans, such loans for the banks would have no economic sense; if the fixed interest rate lower than the bank operating costs, then the loan loss is big, not only to the loss of interest, and even there may be loss of principal.

 

From the foreign exchange loan rate analysis. Because the degree of market exchange rate higher, not only the loan interest will be affected, and even the principal amount of the loan would also suffer a loss. When the dollar yuan exchange rate is1∶8.27When issuing the1Billion dollars in loans to customers, no default, credit rating of excellent, both lenders and borrowers in accordance with the contract, is a normal loans. But now for the loan market assessment, will find this is a great problem loans interest loss, because the exchange rate has been from the1∶8.27Rise to1∶6.62The original use8.27Billion yuan RMB1Billion in principal, according to the current exchange rate only against6.62Billion yuan, the loss of loan principal (8.27-6.62=1.65)1.65Billion yuan, plus $interest losses are greater.

 

According to the analysis of credit risk, the borrower has no default, of course, there is no default loss corresponding; according to the analysis of the market risk, the market will become a big deficit, due to actual loss recovery. According to the provisions of the loan quality classification, the customer does not default, it should be normal loans. But the loan has Fukui, such as back into the exchange loss, in the income statement reflects the loss. Obviously not the loan classification management method is comprehensive, accurately reflect the true quality of credit, recognition and prevention will mislead people about the risks of such loans.

 

Thus, the classification quality of loan of us, not only from the credit risk perspective, to analyze from the market risk, with the China economic and financial marketization degree unceasing enhancement, the market interest rate, exchange rate to speed up the process, influence of market risk to bank loans will be more and more, in the credit risk management must lay emphasis on this problem, should pay attention to this class is not formed by the client default generalized non-performing loans.

 

 

On the significance of non-performing loans

 

Through the analysis on the connotation of the definition of non-performing loans, so that we can see more clearly, classification and clear standards and refine the quality of bank loans, credit risk management to promote the refinement of the necessary. Although the current interest rate is still not fully market-oriented, exchange rate forming mechanism still need further perfect, but the market risk has affected the bank loan proceeds, poses a real risk of bank loans. So we should not only in a narrow sense, but to understand the bad loans from generalized, the significance of the research include:

 

One is to improve the staff's profitability awareness, change the negative credit risk prevention.The strict classification of non-performing loans is to improve staff awareness of bank loan purpose. Banks are enterprises, loans is not the goal, but the means and ways to achieve, can obtain high revenue is the purpose of loan; loan risk prevention purposes, is to ensure the realization of expected return; expected earnings management is to look at the loan loan. The basic requirements for risk management is to find a reasonable balance between risk and return, but not to reject any risk.We can't always in the pursuit of low risk, zero risk, low risk, zero risk also means that low income, low return;It can not always is in under the protection of the policy to maintain the survival. To promote the active risk management, to actively into the market, feel the market. Not only should have the courage, but also to learn good at high risk business, in practice the operation risk to improve their ability of risk identification, risk pricing ability, risk control ability. Not only to review the credit risk, guarantee and risk prevention measures to do a good job security, credit risk management model of security conditions in second owing on the loan risk of the source of the traditional; also focus on loan market risk, make good use of proceeds to cover risks way, make full use of various advanced risk exposure management tools, the compensation for risk, risk to the price to cover the risk, the interest income is greater than the risk, market risk is greater than the average, greater than the risk generally acceptable.

 

Two is to unify our understanding of non-performing loans, improve the market risk identification ability.Bad loans is not the default loans, including both the borrowers default, regardless of whether the loss of interest, should be included in the non-performing loans, including loans have lost, regardless of whether the borrower default, should be taken into bad loans.To take the measure of loan quality standard from the generalized, so that we can in the credit risk management pay more attention to the loan market risks, and strive to improve the ability of market risk identification. And developed a set of credit market risk prevention measures, such as loans regular market assessment, analysis of whether there is a floating loss loss. And as to strengthen the market analysis of the transfer of sale of market of loans, if the loan is excellent premium transfer loan; if can not suffer transfer out loans should also be good, at least not bad loans; if the transfer does not go out or need to discount the transfer of non-performing loans, that is. So the customer credit risk small market risk loans, the expected return is lower than the average return on loans should also like credit risk control, must have the corresponding policies and measures.

 

Three further subdivision of non-performing loans, may have a uniform standard in the principle of classification, classification, classification methods.To adjust the current non-performing loan classification standards, pay close attention to the loan, subprime loans, doubtful loan is subdivided according to the generalized non-performing loans: default and no default interest loan; default loss and no loss given default subprime loans, doubtful loan. And the provision of risk provision, calculating capital according to the relevant provisions, so that the same period different banks or the same bank in different periods of bad loans can be compared real.

 

The bad loans divided into narrow non-performing loans and generalized non-performing loans, so that we can narrow the non-performing loan ratio to disclose, for horizontal comparison, and meet regulatory requirements, make domestic and international trade can have a common standard to compare loan quality. But the general rate of bad loans are mainly used for credit risk management and loan quality assessment within the bank, not only to consider the credit of the borrower, the borrower's risk tolerance and risk control management ability, but also consider the efficiency of resource allocation, resource use rate of return. It can meet the requirements of the internal management, and to compare with the domestic and foreign trade, comparative in ripe conditions can be achieved with narrow and broad sense of non-performing loans.

 

To avoid appearing in the disclosure of information in both the rate of bad loans, and loan default rate, but also keep the non-performing loans as loan losses, the rate of non-performing loans as non-performing loan loss rate. Due to historical reasons,China banking is usually not bad loan loss rate of this concept, because of bad loan losses point very clear, when the loan default after the bank has been in the collection, part will until the end can not collect in loan losses, waiting for the verification process. This process can be very long, even a few years can not be finished, and the loan in the process will continue to be restructured.But the size of bad loans losses, will also have the very big difference in the banking financial institutions, better management of the bank, the loss will be smaller, poor management of some bank losses will be a point, we should actively create conditions for the timely according to the unified standards for loan loss rate for disclosure.

 

The four are different for different types of risk management of the loan, the risk prevention measures of different.A total of fixed rate loans and strictly control the rise in interest rates is expected, unless there has been a hedge is effective or risk compensation according to the schedule; two is to strictly control the amount of the loan interest rate to float downward, and strive to improve the loan bargaining power of customers, excellent preferential interest rate according to the contribution of customers to determine a reasonable, with the speeding up of marketization of interest rate, the bank to business transformation society spreads narrowed after; three to change the current only total foreign exchange loan risk management measures, the foreign exchange loan bank account to the regular transaction market assessment, according to the evaluation result is floating surplus or deficit and to determine the extent of classification, can be done once a month in the calculation of risk; four of income (excludingRAROC), the exchange rate risk into account. Especially with the national exchange rate formation mechanism reform to speed up the process, the risk will increase the bank loans, exchange rate instability will make the foreign exchange loans more problems, of course, the banks can through the foreign exchange market to lock the risk, control risk, to reduce exposure to exchange rate risk and loss.

 

(The writer is chief risk officer, industrial and Commercial Bank of China)