The Governace Of AMC And The Disposal Of NPA

On March 24, this year, the State Council approved the scheme on objective assessment and its'matching steps for AMC, which was put forward by the Ministry of Finance. This is an important step for AMC (abbreviation of asset management corporation) to transform from the policy management to corporate governance. 1. The basic mission of the AMC. OnMarch1999, the second session of NPC decided to "gradually establish the asset management corporation, responsible for disposing the Non-Performing Assets originated from state-owed commercial banks". Henceforth, the State Council passed and put in to action of "Regulations on the Asset Management Corporation", and the main mission of AMC is take over, manage and dispose of the NPA purchased from the state-owned commercial bank." So-called non performing asset(NPA) is referring to those assets that are not in the good condition, and can't performing and bring the normal interest to banks, and even hard to get back the principals, which mainly consist of the non-performing loans(NPL). (a) Historical background By the end of 20 centuries, the financial crisis occurred to the financing institutions in Southeast Asia countries. In order to dispose of NPA, Korea, Malaysia, Thailand decided to set up special organizations. To join the WTO means that our economy gets into the world the economic system, and that we must act according to the rule of WTO in economic activities. Our commercial banks must enter into the competition with foreign banks on the same level, The rate of NPA in state-owned commercial banks(SOCB) has been in a high level, ie 29.2% by the end of 2000, which can't meet the requirement of the capital adequacy of 8% by the Basel Capital Agreement. (b) Objective and Character Central government decided to adopt external way to resolve the NPA problem in order to reduce the amount of NPA of the state-owned commercial banks. On April 20 1999, the first AMCs, Xinda Asset Management Corporation, set up in Beijing. The other three AMC, Huarong, Great Wall, Orient established one after another, corresponding to China Construction Bank, China Industrial and Commercial Bank, China Agriculture Bank, and Bank of China. By the end of 2001, the first purchase of NPA completed, amounting to 1,4 trillion yuan in RMB, which reduced the rate of bad debt of the state-owned commercial bank by 9.2 percentage points. On the decision of the State Council, AMC is the financial institution to purchase, manage and finally dispose of the NPA from state-owned bank. The business scope is as: 1)purchase and manage the non-performing assets sold by the banks; 2)recovery of debts, replacement, lease, transfer and sale of assets; 3)debt-equity swap, temporary share holding, and asset securitization, and so on. Registered capital is10 billion in RMB. 2. The governance of the AMC Upon the establishment, actively introduced method andexperience from same profession abroad, AMC quickly got big success. By May 2004, AMC have totally disposed of to the amount of 675,06 billion yuan in RMB, and the rate of disposal is up to 53.96%. The establishment of AMC is a new subject in the progress of our economy. In the real operation, they meet with some problems and are facing many difficulties. First, the positioning of the AMC is not clear. They are independent legal persons allocated by the Ministry of Finance but engaging in the pure policy work of purchase and disposal of NPA. And because of the relation with the mother bank caused breach of strict in taking over the bad asset. Second, there is no rational standard in minimizing losses through selling. AMC purchased the NPA on the book value without any appraisal or valuation of those assets. So in disposing of NPA. Third, the course of development is indetermination. For quickly realizing assessment quotas, the operational people in local offices could not do the business completely according to the asset condition, market situation, those lead to the failure of minimizing losses. Fourth, the means of disposing NPA is limited and the business scope is narrow, which limit the development of AMC. On special legal position making and the policy advantage, the disposal of NPA had the new content. However, because of the conflict between the policy receiving and marketing disposal, they could not put the new content into real operation and could not obtain the example of the good accomplishment. The meansof disposing NPA are still limit to " dun + litigation+ negotiation+ discount" and the " package". 3. The necessary of good governance of AMC The AMC was supposed to be 10 years in operation at the beginning, now half of that has past. However, considering from the overall finance reform, AMC should be in operation longer. Therefore, to perfect the governance of AMC is very practical and inevitable. (a) The disposal of NPA is a long-term mission of AMC. At present stage, an important mission of AMC is to dissolve the financial risk, reinforce the reform of both the SOCB and the SOE. The bad assets in SOCB reflect the improper management of SOE, which is deeply rooted in our country economy. To come out that situation is not easy and by no means can complete in short time. Therefore, the development of AMC should be put into consideration of our country market economy system and financial organization system (b) It needs longer time for the SOCB to dispose of the bad assets In recent years, the ratio of bad assets in the SOCB descends continuously, on one other hand is because the bank enhanced the management, on the other hand is because the state adds the capital into the banks and new loans increase greatly. It is common saying that the bad assets in the SOCB amount to 2 trillion yuan in RMB. The formation of the bad assets in SOCB result from both factors of the macro policy and micro management, which could not be solve in short-term. (c) The current management of AMC is hard to support thedevelopment over a long time. The AMC is for short stage, and of policy organization, on which no rational corporate governance could be established. On the business means, the lease, exchange of asset, debt-to-equity, restructuring are belonging to an final disposal, not the way of cultivation. Only when AMC get the means of "running" then they have commercial sense and support the development for long-term. 4. Only the perfect corporate governance can realize the long-term development On the 3rd session of 16th Party Committee, the Resolution past and put forward "to perfect the governance of AMC", closely afterwards the Ministry of Finance put that into practice by setting up the objective responsible system by combining the rate of cash recovery and the rate of NPA disposal together. It requests AMC to finish the disposal of debt-equity assets by the end of 2006 and the total assets by the end of 2008. And even more from this year, AMC should start the transformation from policy to commercial. What the Ministry of Finance did has solved the basic problems AMC facing in their lasting development: (a) The objective responsible system has been set up for AMC. According to past experience and the recovery level, the Ministry of Finance established respectively the objective responsible system, which can promote the speed of NPA disposal and raise operating level, which will benefit the national interest, and mitigates the morals risk. (b) Broadening the business scope of AMC. In order to push...