A Study On Prevention Of The Non-performing Loan Increment In The State-owned Commercial Banks

In China, the state-owned commercial banks ("SOCBs") play an important role in the banking industry that they take up 54% stake of the banking industry's total assets. However, their substantial amount of non-performing loans ("NPLs") has long been a shackle of the financial industry's development.The Chinese government has taken many steps to solve this problem, including issuance of RMB270trillion special national debt in 1998 to enhance the SOCBs' capital base, setting up asset management companies in 1999 to peel off their RMB1400trillion NPLs, using USD45trillion foreign reserves for capital injection to Bank of China and China Construction Bank in 2003 and USD15trillion to Industrial and Commercial Bank of China in 2005, both for their corporate reform. Under these measurements, combined with self-cure of the SOCBs, the NPLs and NPL ratio were both greatly reduced. However, the great improvement is mostly attributable to the government's action. China Banking Regulatory Commission also reiterated this issue. If we eliminate this factor, the NPL status is not optimistic.China will open its financial industry at end 2006 and the Chinese financial industry will be further integrated into the global financial system. How to save time improve credit risk management, thoroughly settle the NPL increment and avoid the "peeling off—new increment—peeling off again" cycle, is a key problem to be settled right now and in a long period of time in future.This thesis starts from the actual NPL increment of the SOCBs after eliminating the government's action. I analyzed reason of its formation from outside factors include state-owned enterprise reform, government intervention, macro-control, financial system reform, and from the bank themselves include credit risk management, corporate governance structure and its execution, financial transparency and etc. Meanwhile, I found out current problems in the NPL prevention and control of the SOCBs and later introduced advanced experience of foreign banks in this area. Based on credit risk management theory, together with foreign banks' successful experience and the SOCB's current situation, I raised suggestions from setting up suitable credit risk early-warning system, enhancing internal control of NPL increment prevention, well management of security, self-cure and disposal of NPL, cultivating strong credit culture and enhancing outside supervision to practically and thoroughly solve the NPL increment for the SOCBs in China.