Chinese Commercial Banks' Bad Loan Management: The Causes Of Non-performing Loans And The Kmv Model And Warning

Credit risk management is an important issue for economy entities, especially banks, insurance companies and other financial institutions, etc. Credit risk management has direct impacts on the various transaction parties' interest in the modern economy activities. Meanwhile, credit risk management has a deep relationship with the macro economy policies and country's development and even the global economy's stability. So, it is very important to master the useful tools for credit risk management, especially when sub-prime crisis in USA deteriorates the global financial market.With introduction on the definition of credit risk, history of credit risk management and management methodology, there are detail explanations on the non-performing loans ("NPL") situation in China, with concrete examples. For state-owned enterprises, risks points mainly include overstaffing, operating not under marketing economy rules. For private enterprises, risk points mainly include small scale, with unsophisticated management system. All these risk points can lead to NPL and heavy loss for Chinese banks. Detail analysis is made on Chinese big 4 banks and corporate banks, based on the amount & percentage of NPL. These NPL for big 4 banks and corporate banks are mainly due to economy model transformation and lack of sophisticated ownership & organization structure.The NPL has become a heavy burden for Chinese banks, which lead to an urgent need for external risk management tools to control the NPL effectively. Meanwhile, listed companies are the main customers for Chinese banks, potential risks are high considering all banks' lending mainly concentrate on these listed companies. Combining above 2 factors together, an independent risk management tool, KMV model, is proposed for risk management of NPL for Chinese listed companies.A series of calculation and analysis show that KMV model has strong capabilities in identifying the credit risk of listed companies' NPL. Under the gloomy economy globally, KMV model is a useful tool helping banks on on credit risk management.Finally, in consideration of practical situation, some proposals are given on the usage of KMV model: KMV model can be applied for borrower's parent or subsidiary or as guarantor; peer competitors' KMV models comparison, comparison on history KMV model data, etc. In these ways, KMV model has better utilities on risk-alert function. Meanwhile, some proposal are given to establish a better credit environment for KMV models' usage, like set up default-data system for banks, enlarge the credit rating companies, strengthen the risk punishment mechanism, etc.