NPL disposal needed for revival
By Zang Jiangfan (China Business Weekly)
Updated: 2004-03-15 16:47

[The author is the director of the Banking Supervisory Bureau of Heilongjiang Province.]

To revive the economy in the country's northeast, a much faster pace of disposing non-performing loans (NPLs) and bolder innovation in the process are needed.

The heavy load of NPLs has added a burden to banks and enterprises in this old industrial base, which is in a massive restructuring phase in an effort to improve efficiency.

Such burdens, mostly resulting from the planned economy, have to be dealt with in a timely and efficient manner to ensure the revival and smooth transition of the economy towards a market-driven model.

First, we have to admit that much of the existing NPLs in China's Northeastern Heilongjiang, Liaoning, and Jilin provinces cannot be resolved by regular means.

Though we have managed to keep the NPL rate at a downward track, that is largely based on the rapid increase of new loans that has widened the denominator.

The outstanding volume of NPL still mounts up gradually. By the end of last November, banks in the three provinces reported 372.2 billion yuan (US$45 billion) worth of outstanding NPLs, a 10 billion yuan (US$1.2 billion) increase from the start of the year.More than 70 per cent of the bad loans were attributed by the "Big Four" State-owned banks.

If these deeply entrenched problems in the economic and banking systems remain unsolved, they could brew new credit risks. And NPLs are likely to rebound from time to time even if it gets under control temporarily.

Take Heilongjiang Province for example. By the end of last November, its newly increased NPLs were on top of all provinces and municipalities in China.

During 2001 and 2002, the branches of the "Big Four" State-owned banks in Heilongjiang wrote off a total of 3.2 billion yuan (US$386.4 million) worth of bad debts, but that was only a small ratio of the province's NPL pool.

The situation is more pessimistic for the Agricultural Bank of China and local rural credit co-operatives, as loans in rural projects are even harder to recover.

Now that the central government has promised supportive policies to the economic restructuring of the region, we should grasp this opportunity to pace NPL disposal and introduce new measures.

For old policy-arranged loans that are basically impossible to recover, they would have to be digested by the government and evened by public funds.

Such loans, mostly in the agriculture, forestry and mining sectors, are difficult to dispose of through the market mechanism. Therefore, the government should design special policies to write off such loans and if possible, inject more capital to commercial banks or use tax exemptions.

Regarding enterprises that are scheduled to go bankrupt or be taken over, the debts should be repaid or written off according to legal procedures.

Meanwhile, for NPLs that can still be recovered, more of them should be transferred to professional asset management companies. Or, at the very least, banks should be able to adopt more flexible measures to revive the assets via the market mechanism, including asset transfers, package sales, rentals, biddings, auctions, or other approaches. The delinquent assets can be sold at discounted prices.

The Chinese Government has reiterated that foreign and domestic private investors are encouraged to take part in the restructuring of State-owned enterprises (SOEs), either through mergers and acquisitions or equity investment.

NPL disposal is put in the same policy environment. We should also let in more social investors, both at home and abroad, to help with asset management.

And if conditions allow, foreign venture capital companies may also come in to participate in NPL disposal and enterprise restructuring.

In developed countries, many measures have been used to deal with NPLs through the capital market, which can provide valuable experiences to China. Securitization of NPLs is an often-applied tool.

We can put together assets that presently have low liquidity but may produce stable cash flow in the future, restructure these assets and turn them into securities that can be traded and floated in financial markets.

Enterprises that have a solid outlook should be able to issue special corporate bonds to transfer some of their delinquent loans into bonds. Some local governments should also be allowed to issue government bonds to replace NPLs.

After all, NPL disposal is not something that can be done by the banks alone. It needs better co-ordination from other government departments, such as the finance and taxation authorities, who should work together to accelerate NPL disposal and come up with parallel regulations to clear obstacles.

Tax exemptions and reductions, for example, are necessary to make NPL disposal less costly. In some areas, special trading exchanges can be built up to trade NPL projects, though a premise is that a relative credit system should be established first and intermediaries can assure standard practices.

The theory is to dispose of existing NPLs as soon as possible while putting the potential of new bad loans and lending risks at the minimum. To do that, the People's Bank of China should further improve the registration and information system for bank loan borrowers, while commercial banks themselves should set up sound NPL recovery and risk monitoring practices.

Moreover, legislation regarding these matters and the enforcement of these rules and laws must also catch up.

When granting new loans, banks should base their decisions on scientific and market-driven lending policies, and do good homework in assessing projects and associated risks in advance.

As a banking supervisory agency, we must closely follow macroeconomic policies and strengthen supervision on the lending direction. We must also be cautious of new debt evasion, especially in sectors such as real estate, automobiles and financing using commercial papers.

Moreover, senior bank executives are also to take qualification exams, and those discovered with irregularities should receive severe punishment as well as being disclosed to the public.

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