Non-performing Loans Of Commercial Banks In China And Countermeasures

The first chapter reviews the historical background of the bank failure and the non-performing loan, with a conclusion that the non-performing loan is the main reason leading to the bank failure, although there exists others.The loan and customer relationship is analyzed signifying that a bank tends to increase the volume of its loan in order to foster the customer relationship for the sake of the future profit making. The data analysis of the Chinese situation shows there exists the loan customer relationship after the banks being on the way to commercialization. The existence of the loan-customer and the inter-bank competition is the dominant reason making the loan turn sour.The non-performing loan problem in Chinese banking system, different from those in developed countries, is inherited from the former era of command economy and become obvious in conjunction with the transformation from the planned economy to the market one. The current situation of non-performing loan in China is serious and the diversification of the problem loan among different areas and sectors is vast. The non-performing loan has various impact on the national economy: (1) It has been contributing to the inflation of China; (2) It has a adverse impact on the banking sector, lowering the quality of the assets, fostering a latent financial crisis; (3) It also makes the SOEs on the spot, evidenced by the high level of debt; (4) Apart from these aspects, it will possibly ruin the national public finance, and has been distorting the normal welfare distribution mechanism.The reason that caused the problem loans are broken down into the following: (1) The policy reasons. The policies in former command economy forced some loan into inviable SOEs or unprofitable projects. (2) The economic reasons. The problems in the management of SOEs and banks, and the comparatively low level of financial development contributed a lot to the problem loans. (3) Legal reasons. The laws failed to protect the loan from loss, meanwhile the laws relevant were not seriously abided by. The experience of America, Poland, Japan and other South-east Asian countries, which have the similar problem with China, is analyzed and the possibility of applying these experiences to China is assessed.The rules for dealing with non-performing loans in China include: to avoid triggering off severe turbulence, to co-operate with the government, banks and SOEs, and to work together with SOEs' reform. Meanwhile, to follow the right loan strategies is also crucial to non-performing loan management, which consist of loan pricing properly, loan diversification, credit rating, and making suitable loan policies. Then the detailed plan of dealing with China problem loan is deducted, that is , setting up Asset Management Corporations (AMCs) to handle problem loans under current situations of our country. However, it is just the first step to perfect the banking system since AMCs can't remove the non-performing loans thoroughly. Finally, groping efforts are made. They are: (1) The difficulties and problems that the AMCs are facing; (2) Other and accessorial ways to handle the problem; (3) How to use the successful experience of other countries for reference; (4) Reconsider the method of the conversion from debt to equity; (5) How to implement securitization in China using brand-new method; (6) How to control the new non-performing loans.