The Measures for the Risk Classification of the Financial Assets of Commercial Banks introduced by the People’s Bank of China are expected to come into effect on 1 July 2023. These measures build on the guidelines that are currently in effect by expanding the scope of assets subject to risk classification.
The measures also further clarify objective indicators and requirements for risk classification, propose a new definition of risk classification, and emphasise classification based on the contract fulfilment capabilities of debtors.
According to these new guidelines, overdue financial assets should be classified as special attention, while those that are overdue for more than 90 days and 270 days shall be classified as substandard and suspicious respectively. Finally, financial assets that are overdue for more than 360 days will receive the ‘loss-making’ classification. A creditor’s rights that are overdue for more than 90 days will be classified as non-performing even if collateral guarantees are in order, once the new rules come into effect.
When it comes to the repayment capability of debtors, if 10% of the creditor’s rights for a given debtor at a bank are classified as non-performing, all of the creditor’s rights for such a debtor will classify non-performing at that bank. If the percentage reaches 20% the debtor’s debts across all banks are overdue for more than 90 days, then these debts will be classified as non-performing.
According to representatives from the PBOC and the China Banking and Insurance Regulatory Commission cited by chinabankingnews.com, the measures were designed to encourage commercial banks to identify risk levels in an accurate manner and to implement accurate asset risk classification.
As for credit impairment, new financial instrument standards based on expected credit losses perform impairment accounting treatment of related assets and confirm loss reserves. According to the new measures, assets that have suffered credit impairment should be classified as non-performing assets. Furthermore, expected credit losses that will account for more than 50% of the book balance will be classified as at least secondary, while those that account for more than 90% of the book balance will be classified as losses.
The China Banking and Insurance Regulatory Commission revealed that commercial banks will be subjected to a restructuring observation period for restructured assets. The period will be calculated starting from the date of the first repayment, and it will comprise at least two consecutive repayment periods. If the debtor manages to fix relevant financial problems at the end of the observation period, the relevant assets will no longer be recognized as restructured assets.
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