The head of relevant departments of the People's Bank of China of the China Banking and Insurance Regulatory Commission Answers to reporters' questions on the Measures for the Classification of Financial Assets Risk of Commercial Banks

In order to further promote commercial banks to accurately identify and evaluate credit risks and truly reflect the quality of assets, the China Banking and Insurance Regulatory Commission and the People's Bank of China jointly formulated the Measures for the Classification of Financial Assets Risk of Commercial Banks (hereinafter referred to as the Measures), and the heads of relevant departments answered the questions of reporters about the Measures.
1、 How about the public consultation of the Measures?
From April 30 to May 31, 2019, the Measures were open to the public for comments, and financial institutions, industry self-regulatory organizations, experts and scholars and the public paid extensive attention. We carefully studied the feedback one by one, and fully absorbed scientific and reasonable suggestions on the basis of further research and calculation. The "Measures" set up more scientific and reasonable criteria for the identification of non-performing assets, revised and improved on the basis of fully considering the impact of different clauses and the differences of different types of institutions, which is more conducive to commercial banks to truly and accurately reflect the quality of assets and achieve effective prevention and control of credit risk.
Compared with the draft for comment, the officially issued method has been improved in the following aspects: First, the scope of classified assets has been further clarified, and the financial assets under the bank trading book and the related assets formed by derivative transactions have been excluded from the scope of application of the method. The second is to further clarify the relationship between the five-level classification of financial assets and accounting treatment, and clarify that assets with credit impairment are non-performing assets. The third is to further optimize some classification standards, and adjust and improve clauses such as cross default and asset restructuring. Fourth, further refine the implementation time and scope, reasonably set the transition period, and propose differentiated implementation arrangements.
2、 What is the background of the formulation of the Measures?
Credit risk is the main risk faced by China's banking industry. A sound risk classification system is the premise and basis for effective prevention and control of credit risk. In 1998, the People's Bank of China issued the Guiding Principles for the Classification of Loan Risk, putting forward the concept of five-level classification. In 2007, the former CBRC issued the Guidelines on the Classification of Loan Risk (hereinafter referred to as the Guidelines), which further clarified the requirements for five-level classification supervision. In recent years, the asset structure of China's commercial banks has changed greatly, and the practice of risk classification faces many new situations and problems. In 2017, the Basel Committee issued the Guidelines on Prudential Treatment of Assets, clarifying the identification criteria and classification requirements for non-performing assets and restructured assets, aiming at enhancing the consistency of the classification criteria for asset risk in the global banking industry and the comparability of the results. The new accounting standards also put forward new requirements for some financial instruments with large randomness in classification, delayed and insufficient provision for asset impairment. The CBRC and the People's Bank of China drew on good international and domestic standards, combined with the current situation of China's banking industry and regulatory practice, and formulated the Measures. The Measures aims to further promote commercial banks to accurately identify the risk level and classify the asset risk, which will help the banking industry effectively prevent and resolve credit risk and improve the level of service to the real economy.
3、 What principles should be followed for risk classification of financial assets?
Commercial banks should follow the principles of authenticity, timeliness, prudence and independence when classifying the risks of financial assets. Accurate classification is the starting point for commercial banks to do a good job in credit risk management. Commercial banks should carry out risk classification in strict accordance with the requirements of the Measures, and adjust the classification results in a timely and dynamic manner according to the debtor's ability to perform the contract and the risk changes of financial assets. For financial assets that are difficult to grasp the risk status for the time being, commercial banks should strictly grasp the classification criteria and determine the classification level from a low level. In addition, commercial banks should independently judge the risk level of financial assets on the premise of compliance with laws and regulations, and not be affected by other factors to ensure that the risk classification truly and accurately reflects the risk status of financial assets.
4、 What is the main content of the Measures?
The Measures include six chapters and 48 articles, extending the risk classification object from loans to all financial assets bearing credit risk. In addition to the general provisions and supplementary provisions, it mainly includes four aspects. First, put forward the requirements for financial asset risk classification. Clarify the five-level classification definition of financial assets, set the classification criteria for retail assets and non-retail assets, and put forward institutional requirements for specific situations such as debt overdue, asset impairment, debt evasion and abandonment, as well as the classification of assets involved in the upgrading of classification, enterprise mergers and acquisitions, asset management and securitization products. The second is to propose the risk classification requirements for the reorganization of assets. Refine the definition, identification criteria and exit criteria of the restructured assets, clarify the classification requirements of the restructured assets under different circumstances, and set the observation period of the restructured assets. Third, strengthen bank risk classification management. Commercial banks are required to improve the risk classification governance structure, formulate the risk classification management system, clarify the classification method, process and frequency, develop and improve the information system, and strengthen monitoring analysis, information disclosure and document management. Fourth, clear supervision and management requirements. The regulatory authority shall supervise, inspect and evaluate the risk classification management of commercial banks, and take regulatory measures and administrative penalties against banks that violate the requirements.
5、 How to understand the debtor-centric risk classification concept?
According to the current Guidelines, the risk classification is based on a single loan, and the classification results of multiple loans under the same debtor's name may be inconsistent, which can be either normal, concerned, or secondary, suspicious or loss. The Basel Committee pointed out in the Guidelines on Prudential Treatment of Assets that if any risk exposure of a bank's non-retail counterparty is substantively bad, all risk exposures of that counterparty should be identified as bad. Referring to the above concepts and considering the relatively perfect corporate governance and financial data of corporate customers, the Measures require commercial banks to focus on the evaluation of the debtor's ability to perform when classifying the risk of non-retail financial assets. If the debtor's claims in the Bank exceed 10% and are classified as bad, all of the debtor's claims in the Bank should be classified as bad; If the debtor's debts in all banks are more than 20% overdue for more than 90 days, all banks should classify their debts as non-performing.
It should be noted that the debtor-centric approach is not without consideration of security factors. For non-performing assets, commercial banks can classify different debts under the same non-retail debtor into sub-category, suspicious category or loss category according to the degree of guarantee mitigation of a single asset. For retail assets, banks can also classify the risk of a single asset, taking into account the impact of factors such as business type differences and mortgage guarantees.
6、 How to consider the impact of overdue days and credit impairment in risk classification?
The core of risk classification by commercial banks is to accurately judge the debtor's solvency. Overdue days and credit impairment are important indicators of asset quality deterioration, which can effectively reflect the debtor's solvency. From the perspective of overdue days, the provisions of the current Guidelines on the relationship between overdue days and classification grades are not clear enough. Some banks did not include all claims overdue for more than 90 days into non-performing loans on the grounds of sufficient guarantee. The Measures clearly stipulates that financial assets that are overdue should at least be classified as concerned, those that are overdue for more than 90 days and 270 days should at least be classified as secondary and suspicious, and those that are overdue for more than 360 days should be classified as losses. After the implementation of the Measures, claims overdue for more than 90 days should be classified as non-performing even if the mortgage guarantee is sufficient. From the perspective of credit impairment, the new financial instrument standard takes the expected credit loss as the basis, carries out impairment accounting treatment for related assets and confirms the loss provision. The Measures, referring to the requirements of the new accounting standards, stipulate that assets with credit impairment should be classified as non-performing, in which the expected credit loss accounting for more than 50% of the book balance should be classified as suspicious, and the expected credit loss accounting for more than 90% of the book balance should be classified as loss.
7、 What changes have been made to the provisions of the Measures on restructuring assets?
The current Guidelines do not fully clarify the two key concepts of "deterioration of the debtor's financial condition" and "contract adjustment" involved in the restructuring of loans, and stipulate that the restructured loans should be classified as non-performing loans. Drawing on international experience, the Measures further refined the concept of reorganization. First, clarify the definition of assets to be restructured, focus on making detailed provisions on the two concepts of "financial difficulties" and "contract adjustment", and refine various situations in line with the concept of reorganization, which is conducive to the implementation of bank control and blocking the regulatory arbitrage space. The second is to extend the observation period of restructuring from at least 6 months to at least 1 year, and take relatively moderate measures during the observation period, which is conducive to promoting the smooth progress of debt restructuring. Third, according to the principle that substance is more important than form, it is no longer uniformly required that the restructured assets must be classified as non-performing, but at least as concerned. Restructured assets classified as non-performing assets that meet the conditions for non-performing increase during the observation period can be raised to the category of concern. Fourth, the classification of multiple restructurings was clearly defined, requiring that the assets restructured should be at least classified as secondary, and the observation period should be recalculated if they were not repaid in full and in time as agreed in the contract, or if the financial situation did not improve despite full repayment.
8、 What are the implementation arrangements of the Measures?
The implementation of the Measures takes full account of the impact on institutions and markets, reasonably sets up a transition period, and gives relevant banks ample time to prepare for the implementation of the Measures. The Measures will be formally implemented on July 1, 2023. The new businesses of commercial banks since the formal implementation of the Measures, i.e. the businesses that have occurred since July 1, 2023, should be classified according to the requirements of the Measures; For businesses that have occurred before the formal implementation of the Measures, that is, businesses that have occurred before July 1, 2023, commercial banks should formulate a reclassification plan, and by December 31, 2025, all stock businesses should be reclassified according to the requirements of the Measures.
Commercial banks should, in accordance with the provisions of the Measures, formulate scientific and reasonable work plans on the premise of continuous and stable operation, comprehensively investigate the problems existing in the classified management of financial assets risk, and rectify them as soon as possible. New businesses shall be classified in strict accordance with the requirements of the Measures. For stock assets, they should be reclassified within the transition period to meet the standards on time. At the same time, commercial banks should, in accordance with the new regulatory requirements, establish and improve the risk classification governance structure, improve the risk classification management system, optimize the information system functions, strengthen monitoring analysis and information disclosure, and effectively improve the risk classification management level.