Chinese Central Bank Issues New Risk Rules for Financial Assets of Commercial Banks, Applies New Requirements for Non-Performing Assets

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The People’s Bank of China (PBOC) has launched new rules governing the risk categorisation of financial assets held by the country’s commercial banks.

On February 11, PBOC announced the release of the “Measures for the Risk Classification of the Financial Assets of Commercial Banks” (商业银行金融资产风险分类办法), which is scheduled to come into effect on July 1, 2023.

Compared to the Guidelines that are currently in effect, the Measures expands the scope of assets subject to risk classification, proposes a new definition of risk classification, place emphasis on classification based upon the contract fulfilment capability of debtors, as well as further clarifies objective indicators and requirements for risk classification.

The Measures stipulate that financial assets that are overdue shall be at the very least least classified as special attention (关注), while those overdue for more than 90 days and 270 days shall be classified as substandard (次级类) and suspicious (可疑类) respectively. Financial assets that are overdue for more than 360 days shall be classified as loss-making.

Once the Measures come into effect, creditor’s rights that overdue for more than 90 days should be classified as non-performing even if collateral guarantees are adequate.

With regard to the repayment capability of debtors, if more than 10% of creditor’s rights for a given debtor at a bank are classified as non-performing, all the creditor’s rights for such debtor shall be classified as non-performing at that bank. If more than 20% of a debtor’s debts across all banks are overdue for more than 90 days, all banks shall classify its debts as non-performing.

Officials from PBOC and the China Banking and Insurance Regulatory Commission (CBIRC) said that the goal of the Measures is to further spur commercial banks to accurately identify risk levels and implement accurate asset risk classification, which will help the banking sector to effectively prevent and resolve credit risks and improve its ability to serve the real economy.

In terms of credit impairment, new financial instrument standards are based on expected credit losses, conduct impairment accounting treatment of related assets and confirm loss reserves. The Measures make reference to the requirements of these new accounting standards, stipulating that assets that have suffered credit impairment should be classified as non-performing assets. Expected credit losses accounting for more than 50% of the book balance should be classified as at least secondary, and those accounting for more than 90% of the book balance should be classified as losses.

CBIRC has also stipulated that commercial banks shall be subject to a restructuring observation period for restructured assets. The observation period shall be calculated from the date of the first repayment agreed upon following contract adjustment, shall include at least two consecutive repayment periods, and shall not be less than one year.

At the end of the observation period, if the debtor has resolved its financial difficulties and made timely and full repayments in accordance with the contract of the provisions within the observation period, the relevant assets may no longer be recognized as restructured assets.