In The New Era Of Chinese Commercial Banks' Credit Risk Management

The topic of this article is how to manage credit risk of loan in China in the new era. The whole thesis consists of 5 chapters. In preface the author states why he chooses this topic as his article for Master degree. In China's commercial banking industry, loan asset is beyond eighty percent of the general asset. It is the most important asset of China's commercial banking. Thus the quality of loan is a question of vital importance. In China's commercial banking problem loan constitutes beyond twenty percent of total loans, so how to control credit risk of loan is a crucial question of China's commercial banking. Chapter 1 defines credit risk of loan and divides it into two basic parts -transaction risk and portfolio risk. Then the author studies the general reasons of credit risk in market economy. On this basis, this chapter focuses on some special reasons of credit risk in China's commercial banking. Chapter 2 states the organizational structure of the lending function and internal control system in it. Because the organizational structure of lending function is the basis of internal control system, the author firstly compares the organizational structure of lending function of Chinese commercial bank with the structure of foreign commercial bank, then studies the internal control system in the organizational structure of lending function. The author proposes the lending organization should be composed of credit department, loan department and review department. The primary mission of the credit department is to evaluate the credit worthiness and debt capacity of present loan customers and loan applicants. The duty of the loan department is approving a loan request. The review department is responsible for reviewing loans. The lending process should be as follows: When loan department accepts a loan application, it should do credit investigation and send credit information to credit department. The credit department evaluates the credit worthiness, ranks the credit risk. Then the analyst sends the credit report to the loan department. At last, the loan department approves or rejects the loan request. The author also suggests that the lending function should be separated from the administration function. Finally the author emphasizes three questions related to the lending organizational structure. They are loan review, loan policy, internal control in loan processing. The author emphasizes the fundamental purpose of loan review is to reinforce a "credit culture" within the lending organization. The credit culture relies on loan officers, not the loan review department as the basic defense against deteriorating credit quality. Loan policy provides guidance and focus to the bank's lending activity. It is very important to control credit risk and should be emphasized in Chinese commercial banking. Chapter 3 states credit evaluation before making a loan. In this chapter the author focus on four aspects in credit evaluation. They are as follows: 1. Four basic credit factors, 2.credit investigation, 3.financial analysis, 4. Ranking credit risk. The four basic credit factors are: the borrower's character and soundness, the intended use of loan funds, the primary source of loan repayment, secondary sources of repayment. The credit investigation attempts to develop an understanding of the nature of the borrowers in terms of the four basic credit factors. Financial analysis and ranking credit risk is to quantify credit risk of loan. In ranking credit risk, financial factor is the most important, non-financial factors should be considered as well. The primary rank should be derived from financial factor. If non-financial factors benefit the borrower, the rank can't be adjusted higher. But if non-financial factors do harm to the borrower, the credit analyst should adjust the credit rank of the borrower lower. In this chapter the author also states how to monitor the credit of the borrowers and how to protect the credit. This is very important to shift Chinese economy from "repudiating economy" to "...