Research On The Five-class Classification Of Loans In China

Indirect financing plays a main role in China's capital market, and commercial banks which sell credit products are the core intermediaries in this market. For an open economy, the quality of credit assets of commercial banks has a key effect on the financial stability of the macro economy and the international competition of banking industry. So the supervisor watches the assets quality closely.The Five-class Classification of Loans is the base of the calculation of the series of indicators, which are used to evaluate the credit asset quality of the commercial banks. The classification was introduced from America as a credit risk managing method. It has been ten years since 1998 when state-owned commercial banks were regulated to hand in their data on loans quality, in the framework of the Five-class Classification of Loans.China's macro economy has kept a high growth rate for many years. The improvement of the underling economic circumstance and the financial reform causes rapid growth of the banks. China's commercial banks have made solid progress in total assets and earnings. However, since banks manage risk to make a profit, they used to accumulating huge risk in the booms of the business circle for the reason of underestimating the risks and loosening the standards for loans, which tend to result in the bankruptcy of banks in the recession for the frequent defaults of enterprises.So this paper chooses the application of the Five-class Classification in China. The beginning of the paper studies the characteristics of the Five-class Classification, and then the paper recalls China's specific implementation after the introduction of the Five-class Classification. The following part summarizes the relevant domestic researches, and then on the basis of a classification of the method by Basel Committee, focuses on the application evaluation in three aspects. The fourth part of the article uses the data from the semi-annual and annual reports of five listed joint-stock commercial banks for empirical research. The time term of the pool of the data is from 2001 to 2007. And in the regression analysis, there are factors including a dummy variable which stands for the effect of the implementation of the Five-class Classification. The results show that the rate of non-performing loans are determined mainly by changes of the macroeconomic situation, the bank's capital adequacy, the banking net assets yield, the total loans in the total assets of banks, and the impact of dummy variables. While there is a clear correlation between the dummy variable and the rate of non-performing loans, but not the negative relation which is not expected. This shows that after the introduction of the advanced classification method, banks haven't done well in the improvement of the existing risk management by improving the quality of credit assets, and then possible reasons for this result are analyzed. Finally, by talking about the existing classification's self-improvement and the latest international development, the last part of the paper predicts the next step of China's Five-class Classification development.