People's Bank of China, Classification of Loan Risks Guiding Principles

Issued: December 24 2001
Effective: as of date of issue
Interpreting authority: People's Bank of China
Applicability: The Guiding Principles apply to all commercial banks (Article 31). The "loans" referred to in the Guiding Principles means the various types of loans referred to in the Lending General Provisions (Article 28).

Main contents: Under the Guiding Principles, loans are classified in terms of quality into five categories, namely, normal, attention, substandard, dubious and loss, with the loans in the last three categories being considered non-performing loans (Article 3). The classification is mainly based on the repayment ability, repayment record and repayment intention of the borrower, the security of the loan, the legal liability for repayment, and the credit management of the bank (Article 5). The repayment ability of the borrower shall be considered as the core factor for classification (Article 6). If a loan requires restructuring, it falls into the substandard category at best, and if any further default occurs, it shall fall into the dubious category at best (Article 7). Where a borrower attempts to avoid its obligations under a loan through corporate merger, reorganization or division, the loan shall be classified into the attention category at best (Article 8). Loans made in violation of laws and regulations shall at best be put into the attention category (Article 9). Commercial banks shall carry out such classification at least every six months and at shorter intervals for non-performing loans (Article 14). Commercial banks may formulate their own classification systems on the basis of these Guiding Principles, provided the classes in such systems correspond and are convertible into the classes adopted by the People's Bank of China (Article 12). The People's Bank of China will, in principle, conduct on-site inspections of the loans of each commercial bank on an annual basis (Article 24).