Monitoring and Assessment of Non-performing Assets of Commercial Banks Tentative Procedures

(Promulgated by the China Banking Regulatory Commission on, and effective as of, March 25, 2004.)

PART ONE: GENERAL PROVISIONS

Article 1: These Procedures are formulated in accordance with the PRC Banking Regulation Law, the PRC Commercial Banking Law, and other relevant laws and administrative regulations to strengthen the sustained, prudent and effective regulation of commercial banks, to cause the commercial banks to perfect their internal control systems, to improve the quality of the assets, and to protect against risks.

Article 2: These Procedures shall be applicable to the monitoring and assessment of non-performing assets of commercial banks and their branches and sub-branches by the regulatory authorities of the China Banking Regulatory Commission (hereafter, the CBRC) at all levels.

Article 3: The monitoring and assessment of non-performing assets of commercial banks shall be the comprehensive monitoring and assessment of the risks of non-performing loans, non-credit assets and off-balance-sheet business activities.

Article 4: Non-performing loans shall be strictly handled according to the five-grade classification standards for loans. The classification standards for non-credit non-performing assets shall be formulated separately. Prior to such formulation, the classification standards for non-credit non-performing assets may be handled by making reference to the five-grade classification standards for loans.

PART TWO: MONITORING OF NON-PERFORMING ASSETS

Article 5: Commercial banks shall adopt effective measures to monitor and control their non-performing loans on a case-by-case and real-time basis, to monitor the changes in the risks of non-credit assets and off-balance-sheet business activities, as well as to directly monitor the key institutions and clients.

The regulatory authorities of the CBRC at all levels shall establish and perfect their monitoring and assessment systems for non-performing assets.

Article 6: Key institutions shall be: branches and sub-branches of banks ranking top five in terms of the non-performing loan ratio; branches and sub-branches of banks whose outstanding balance of non-performing loans is increasing rather than decreasing or whose non-performing loan ratio is rising rather than declining; branches and sub-branches of banks ranking top five in terms of the estimated loss ratio of non-credit assets; branches and sub-branches of banks whose management of off-balance-sheet business activities is in disorder and which have committed acts in violation of the laws or regulations.

Key clients shall be: clients with an outstanding balance of non-performing loans of Rmb100 million or more and corporate clients with five or more affiliated enterprises and an aggregate outstanding balance of loans of Rmb100 million or more.

PART THREE: ANALYSIS OF NON-PERFORMING ASSETS

Article 7: The regulatory authorities of the CBRC at all levels, the commercial banks and their branches and sub-branches shall carry out an analysis on non-performing loans on a monthly basis and on non-performing assets on a quarterly basis, and shall make an overall judgment and assessment of the risks of the banks and the tendency of changes, give highlighted explanations on serious risk exposure and apparent changes, and form an analysis report. Analysis of non-performing assets shall include three parts: analysis of non-performing loans, analysis of the risks of non-credit assets, and analysis of the risks of off-balance-sheet business activities.

Article 8: Analysis of non-performing loans shall mainly include the following:

(1) Basic information. Outstanding balance of loans, and outstanding balance and ratio of non-performing loans for the current period, as well as changes against the previous period and the beginning of the year. In the event of any major changes or unusual circumstances with respect to the overall trend, geographical distribution and industrial distribution, a highlighted analysis shall be conducted on the reasons therefor.

(2) Regional and client structures. Each commercial bank shall provide tables respectively explaining and analyzing the top 10 Grade One branches with relatively high outstanding balance or ratio of non-performing loans and the 10 clients with the largest outstanding balance of loans or non-performing loans. Each banking regulatory bureau shall determine at its own discretion the number of regions and clients according to actual circumstances.

(3) Settlement and conversion of non-performing loans. Analysis may be conducted respectively according to the settlement in cash, the writing off of loans, the settlement of debts with assets and other forms.

(4) Quality of newly advanced loans. Continuous monitoring and analysis shall be conducted on the quality of the loans advanced since 2003 and the status of the newly advanced loans for the current year.

(5) Analysis of the internal and external reasons for newly incurred non-performing loans and typical cases thereof. External reasons shall include poor operation and management or bankruptcy and winding-up of the enterprises, evasion and voiding of debts to the banks by the enterprises, violation of the laws and regulations by the enterprises, and administrative interference from the local governments; internal reasons shall include violation of the "three-inspection" system for loans, violation of the regulations on the authorization and granting of credits for loans, violation of the law by the employees of the banks.

(6) Projection of the tendency of changes in non-performing loans shall be conducted and measures and opinions for continuing the proper management or regulation of non-performing loans shall be proposed.

Article 9: Analysis of the risks of non-credit assets shall mainly include the following:

(1) Basic information. Outstanding balance of non-credit assets, and outstanding balances and ratios of non-performing assets and estimated losses for the current period, and changes against the previous period and the beginning of the year. In the event of relatively significant changes in the non-credit non-performing assets and estimated losses for the current period, an analysis shall be conducted on the underlying reasons, especially changes in various types of assets pending disposal, assets pending verification, and audited funds from accounts receivable.

(2) Analysis of geographical structure. Each commercial bank shall provide tables respectively explaining and analyzing the top 10 Grade One branches whose outstanding balance and ratio of non-credit non-performing assets and estimated losses are relatively high. Each banking regulatory bureau may determine at its own discretion the number of regions according to actual circumstances.

(3) Analysis of the settlement and disposal of non-credit non-performing assets.

(4) Analysis of the reasons for the newly incurred non-credit non-performing assets since 2003, especially the issues existing in internal risk controls and typical cases thereof.

(5) Projection of the tendency of changes in non-credit non-performing assets and estimated losses, and measures and opinions for continuing the proper management or regulation of non-credit assets.

Article 10: Analysis of the risk exposure of off-balance-sheet business activities shall mainly include the following:

(1) Basic information. Outstanding balance of off-balance-sheet business activities and outstanding balance and ratio of advances (or losses) for the current period, and changes against the previous period and the beginning of the year. Off-balance-sheet business activities with increasing outstanding balance of advances shall require highlighted explanation.

(2) Analysis of geographical structure. Each commercial bank shall provide tables respectively explaining and analyzing the top 10 Grade One branches with relatively rapid development of off-balance-sheet business activities and with relatively more advances. Each banking regulatory bureau may determine at its own discretion the number of regions according to actual circumstances.

(3) Analysis of the reasons for the forming of advances for off-balance-sheet business activities, especially the issues existing in internal risk controls and typical cases thereof.

(4) Projection of the tendency of changes in advances for off-balance-sheet business activities and measures and opinions for continuing the proper management or regulation of off-balance-sheet business activities.

PART FOUR: ASSESSMENT OF NON-PERFORMING ASSETS

Article 11: The regulatory authorities of the CBRC at all levels shall conduct assessment on a quarterly basis of the non-performing assets and the management thereof of commercial banks and their branches and sub-branches.

Article 12: The assessment of non-performing assets shall be divided into the assessment of the quality of loans, the quality of non-credit assets, and the quality of off-balance-sheet business activities. The contents of such assessment shall include the assessment of the outstanding balance and ratio of non-performing assets, and the progress of the bank subject to assessment shall be reflected through horizontal and vertical comparisons.

Article 13: The indicators for the assessment of the quality of loans shall include the ratio of non-performing loans, the changes in the ratio of non-performing loans, the changes in the outstanding balance of non-performing loans, the rate of change in the outstanding balance of non-performing loans, the extent of change in the outstanding balance of non-performing loans, the extent of change in the ratio of non-performing loans and the rate of progress in the settlement in cash.

The indicators for the assessment of the quality of non-credit assets shall include the ratio of non-credit non-performing assets, the changes in the ratio of non-credit non-performing assets, the changes in the outstanding balance of non-credit non-performing assets, the rate of change in the outstanding balance of non-credit non-performing assets, the extent of change in the outstanding balance of non-credit non-performing assets, and the extent of change in the ratio of non-credit non-performing assets.

The indicators for the assessment of the quality of off-balance-sheet business activities shall include the ratio of advances for off-balance-sheet business activities, the changes in the ratio of such advances, the changes in the outstanding balance of such advances, the rate of change in the outstanding balance of such advances, the extent of change in the outstanding balance of such advances, and the extent of change in the ratio of such advances.

Article 14: The regulatory authorities of the CBRC at all levels shall make an overall evaluation on a quarterly basis of the non-performing assets and the management thereof of commercial banks according to the progress of their assessment of the non-performing assets of commercial banks, and shall submit their reports on the assessment of non-performing assets on a quarterly basis.

The result of the assessment of non-performing assets shall serve as an important reference for the annual assessment and evaluation of commercial banks.

Article 15: The regulatory authorities of the CBRC at all levels shall, on a quarterly basis or on an irregular basis according to the risk exposure, conduct interviews to receive reports on the changes in non-performing assets from the commercial banks subject to their jurisdiction, and shall circulate to the commercial banks the result of the assessment of non-performing assets and put forward their opinions on the prevention and resolution of non-performing assets.

PART FIVE: SOURCES AND ANALYSES OF DATA AND INFORMATION, AND TIME FOR SUBMITTING THE ASSESSMENT REPORTS

Article 16: The data and information in the reports on the analysis and assessment of non-performing assets shall originate from off-site regulatory statistical statements, other statistical statements required by the CBRC and reports on the analysis of non-performing assets submitted by commercial banks.

Article 17: The regulatory authorities of the CBRC at all levels shall verify key data based on the information they keep track of on a daily basis and through on-site inspections. In the event of any major adjustment, they shall provide an explanation in their analysis and assessment reports.

Article 18: The head office of each commercial bank shall submit its report on the analysis of non-performing loans for the preceding month to the CBRC prior to the 15th day of each month, and shall submit its quarterly and annual analysis reports on non-performing assets respectively within 20 days after the end of each quarter and within 30 days after the end of each year.

Each banking regulatory bureau shall submit its report on the analysis of non-performing loans for the preceding month to the CBRC prior to the 15th day of each month, and shall submit its quarterly and annual analysis and assessment reports on non-performing assets respectively within 20 days after the end of each quarter and within 30 days after the end of each year. In the event of a major change in the non-performing assets subject to its jurisdiction, a report shall be submitted in a timely manner. The time for the branches and sub-branches of commercial banks to submit their analysis reports shall be determined by each banking regulatory bureau.

PART SIX: LIABILITIES FOR THE MANAGEMENT AND REGULATION OF NON-PERFORMING ASSETS

Article 19: Commercial banks shall strengthen their management of non-performing assets, submit the analysis reports on non-performing assets to the regulatory authorities of the CBRC at all levels on schedule, submit reports in a timely manner in the event of major incidents, and ensure that the data of non-performing assets are true and accurate, the analysis of the reasons therefor are comprehensive and in-depth, the analysis of the trend is rational and scientific, and the measures are timely and effective.

Article 20: In the event that any commercial bank or any of its branches or sub-branches fails to submit reports in a timely manner in accordance with the requirements of these Procedures or conceals and fails to report any major problems, the CBRC shall impose punishments in accordance with, among other laws and regulations, the PRC Banking Regulation Law, the PRC Commercial Banking Law, and the Penalties for Illegal Financial Acts Procedures, and the provisions of relevant financial rules.

For the principal in charge and the related responsible person(s) of the organization that has committed an act in violation of the laws or regulations, the CBRC shall, in accordance with the relevant provisions, give a warning, impose a fine, cancel the qualifications of the senior managerial personnel for the relevant positions or, pursuant to the administrative authority for cadres, order the commercial bank to impose disciplinary sanctions; where a criminal offence is constituted, the liability shall be investigated and established in accordance with the law.

Article 21: The regulatory authorities of the CBRC at all levels shall establish a professional responsibility system for the regulatory personnel according to the credit assets, non-credit assets and off-balance-sheet business activities, and shall submit to their superior authorities in a timely manner the reports on the analysis and assessment of the non-performing assets of the commercial banks subject to their jurisdictions.

Article 22: For commercial banks and their branches and sub-branches with problems such as heavy non-performing assets, poor operation and management, or being involved in major cases, the regulatory authorities of the CBRC at all levels shall take effective regulatory measures, including suspending the examination and approval of the establishment and upgrading of organizations and the commencement of new business activities.

Article 23: For the regulatory departments that fail to submit their analysis and assessment reports on non-performing assets in a timely manner in accordance with the requirements, their superior authorities shall issue to such regulatory authority a circular of criticism; in the event that such regulatory authority conceals and fails to report any major problems, administrative sanctions shall be imposed in accordance with the relevant provisions; where a criminal offence is constituted, the liability shall be investigated and established in accordance with the law.

PART SEVEN: SUPPLEMENTAL PROVISIONS

Article 24: Each commercial bank may formulate its corresponding implementing rules pursuant to these Procedures.

Article 25: The CBRC may adjust and amend these Procedures according to the actual regulation so as to ensure the effectiveness of regulation.

Article 26: The CBRC shall be responsible for interpreting these Procedures.

Article 27: These Procedures shall be implemented from the date of promulgation.

1. Translation provided by White & Case.