Author| Produced by Allen| Consumer Finance Channel
In order to further promote commercial banks to accurately identify and assess credit risks and truly reflect asset quality, the China Banking and Insurance Regulatory Commission and People's Bank of China jointly formulated the Measures for the Risk Classification of Financial Assets of Commercial Banks (hereinafter referred to as the Measures), which came into force on July 1, 2023.
Historical non-performing assets and assets that hide dirt and dirt have always been hidden in the "dark room", which is an unspoken rule of the industry, but since this month, the gray space that is difficult to penetrate for supervision has become more and more difficult to cover up, and it will be more and more difficult to beautify regulatory statements and financial statements in the future.
Last month, the Hainan Banking and Insurance Regulatory Bureau fined Hainan Chengmai Changjiang Village and Town Bank 1.6 million yuan for inaccurate five-level loan classification and untrue asset quality, and in December last year, Jilin Bank was fined 1.5 million yuan and 1.4 million yuan for violations of laws and regulations such as inaccurate risk classification of non-credit assets and credit assets.
Regulation is starting to hit hard, and a new curse on banks is coming.
A sound risk classification system is a prerequisite for effective prevention and control of credit risks. In 1998, the People's Bank of China issued the Guiding Principles for Classification of Loan Risks, which put forward the concept of five-level classification. In 2007, the former China Banking Regulatory Commission (CBRC) issued the Guidelines for Classification of Loan Risk (hereinafter referred to as the Guidelines), which further clarified the five-level classification regulatory requirements.
The Consumer Finance Channel believes that the promulgation of the Measures strengthens the aforementioned requirements for the risk classification of financial assets and deepens the detailed rules, which has a great impact on the banking industry and is of great significance.
Core content, five main aspects
The Measures consist of 48 articles in six chapters, requiring commercial banks to follow the principles of authenticity, timeliness, prudence and independence to classify all on- and off-balance sheet financial assets that bear credit risks. Compared with the current Guidelines, the Measures expand the scope of assets for risk classification, propose a new definition of risk classification, emphasize the classification concept centered on the debtor's ability to perform the contract, and further clarify the objective indicators and requirements for risk classification. At the same time, the Measures put forward systematic requirements for commercial banks to strengthen the management of classified risks, and clarify relevant measures for supervision and management.
1. The scope of classified assets has been expanded
Compared with the 2007 version of the Guidelines for Classification of Loan Risks, the Measures not only put forward classification requirements for loans, but also added risk classification requirements for other assets of banks' non-loans, and clarified that "all 'on- and off-balance sheet financial assets' that bear 'credit risk' of banks are subject to risk classification", and the scope of bank assets included in supervision has been expanded.
Financial assets that bear credit risk on the balance sheet, including but not limited to loans, bonds and other investments, interbank assets, receivables, etc. Where off-balance sheet projects bear credit risk, risk classification shall be carried out in accordance with the relevant requirements for assets on the balance sheet.
2. Exceptional assets
Financial assets under the transaction books of commercial banks and related assets formed by derivatives transactions are not included in these Measures.
According to the Accounting Standard for Business Enterprises No. 22 Recognition and Measurement of Financial Instruments issued by the Ministry of Finance in April 2017, the "exceptional assets" and "financial assets bearing credit risk on the balance sheet" are two different types of assets, and the recognition and measurement standards are inconsistent. Therefore, the "China Banking and Insurance Regulatory Commission and the People's Bank of China" continue the similar management classification thinking.
3. Specific classification
Financial assets are divided into five categories according to the degree of risk, which are normal, concern, subordinate, suspicious and loss, and the latter three are collectively referred to as non-performing assets.
The principle of classification is exquisite,
First, if the risk classification of financial assets is uncertain, the classification level should be determined from the lowest.
Second, if more than 10% of the claims of a non-retail debtor in the Bank are classified as non-performing, all claims of the debtor in the Bank should be classified as non-performing. Credit enhancement methods approved by the financial administration department under the State Council are excluded.
Third, the same claim shall not be divided into categories.
Fourth, when classifying the risk of asset management products or asset securitization products invested, it should penetrate into the underlying assets. For products that cannot fully penetrate the underlying asset, the product risk classification should be determined according to the asset with the worst risk classification among the penetrable underlying assets. If you want to hide and hide, there is no way to cover overdue and non-performing assets.
4. Non-performing assets
The overdue standard for non-performing assets has not been tightened, but more attention has been paid to the debtor's first source of repayment for retail assets, and the consideration of guarantee situation has been weakened. For retail assets, even if the guarantee coverage ratio is sufficient, they should be classified as non-performing assets if they are 90 days overdue under the off-the-date method.
Subordinated, suspicious and loss, these three types of financial assets are collectively referred to as non-performing assets.
Retail assets include personal loans, credit card loans, and small and micro enterprise claims. Among them, personal loans, credit card loans, and small and micro enterprise loans can be classified by the off-the-term method. The out-of-date method, equivalent to a special matrix, has only one dimension of overdue days. For example, 1 day overdue into attention, 90 days overdue into secondary level, 270 days overdue into suspicious, 360 days overdue into loss.
5. In terms of non-performing standards, banks are looser than consumer finance companies
Strict non-performing standards (60 days) compared to banks, consumer finance companies and auto finance companies.
On December 29, 2020, the China Banking and Insurance Regulatory Commission (CBIRC) issued the Notice on Promoting the Sustainable Development of Consumer Finance Companies and Auto Finance Companies to Enhance Their Sustainable Development and Improve the Quality and Efficiency of Financial Services, which provides that all loans overdue for more than 60 days are included in the non-performing and the capital adequacy ratio is not lower than the minimum regulatory requirements, and consumer finance companies and auto finance companies can apply to the local CBIRC to reduce the regulatory requirements for provision coverage ratio to not less than 130%. Auto finance companies can apply to reduce the regulatory requirement for loan provision ratios to no less than 1.5%. Provision for loan losses released by the reduction of provision targets shall be given priority to the write-off of non-performing loans, and shall not be used for the payment of salaries and dividends.
The high non-performing standards of consumer finance companies have led to an increase in the non-performing rate, a decline in profits and capital, and the corresponding supervision has also given a buffer measure:
First, consumer finance companies can also issue secondary capital bonds in the interbank market to supplement capital; Second, the regulatory requirement for provision coverage ratio has been reduced to no less than 130%.
The transition period is two and a half years, with the end of 2025
New business of commercial banks starting from July 1, 2023 shall be classified according to the requirements of these Measures. For transactions that occurred before July 1, 2023, commercial banks should formulate a reclassification plan, and before December 31, 2025, reclassify all existing businesses in a quarterly planned and step-by-step manner in accordance with the requirements of these Measures.
The supervision encourages qualified commercial banks to complete the reclassification of existing businesses ahead of schedule. During the transition period, existing businesses that have not yet been reclassified in accordance with the Measures shall be classified in accordance with the relevant provisions of the Guidelines for Loan Risk Classification (CBRC [2007] No. 54).
The Measures emphasize:
"The Measures for the Risk Classification of Financial Assets of Commercial Banks formulated by the China Banking and Insurance Regulatory Commission and the People's Bank of China have been deliberated and adopted by the first committee meeting of the China Banking and Insurance Regulatory Commission in 2020 on March 17, 2020, and are hereby promulgated and will come into force on July 1, 2023."
In the view of the "Consumer Finance Channel", the Measures were deliberated and adopted three years ago in 2020, but they were only announced three years later in 2023, which shows the prudence of the introduction of the system and fully considers the impact of the new crown epidemic on the financial assets of commercial banks in the past three years, which has given commercial banks time and space to digest and adjust their assets.
In recent years, the asset structure of mainland commercial banks has undergone great changes, the practice of risk classification is facing many new situations and problems, and the current risk classification supervision system has some shortcomings and deficiencies. The State Administration of Financial Regulation (formerly the China Banking and Insurance Regulatory Commission) and the People's Bank of China, drawing on international and domestic good standards, combined with the current situation of the mainland banking industry and regulatory practices, formulated and issued the Measures for implementation, which is of great significance to promoting commercial banks to strengthen credit risk management and improve their comprehensive risk management capabilities.