Improving Debt Provisioning by Chinese Financial Institutions: New Ministry of Finance Rules

By Michael G. DeSombre and Weiheng Chen, Sullivan & Cromwell LLP, Hong Kong

On May 25, 2005, the PRC Ministry of Finance (MOF) issued Measures for the Administration of Debt Provisioning by Financial Institutions (金融企业呆账准备提取管理办法)(the 'Provisioning Measures'), which became effective on July 1, 2005. The Provisioning Measures - which are in line with the 2001¹ five-category loan classification system and the 2004² Measures for the Administration of Capital Adequacy Ratios of Commercial Banks ('Capital Adequacy Rules') - provide regulatory guidance detailing how the provisioning for non-performing debts should be determined and allocated by financial institutions. The Provisioning Measures specifically provide a mechanism whereby commercial banks must implement their obligations under Article 16 of the Capital Adequacy Rules, including deducting relevant provisions from loans and assets prior to determining risk-weighted asset amounts.

The Provisioning Measures apply to financial institutions incorporated in the PRC upon the approval of the China Banking Regulatory Commission (CBRC), including policy banks, commercial banks, trust and investment companies, finance companies, finance leasing companies, urban and rural credit cooperatives but excluding financial asset management companies.³ Under the Provisioning Measures, a financial institution is required to make provisions for non-performing debts ('non-performing debt provisions') for debt and equity assets which bear risks and may incur losses. These assets include, among others, loans, bank card overdrafts, discounts, credit advances, documentary drafts for imports and exports, equity investments and debt investments, interbank borrowings, interbank deposits, interest receivables, dividends receivable, leasing receivables and other receivables. Non-performing debt provisions include: