China tightens asset risk classification rules for banks

China has tightened risk management requirements on commercial banks, requiring banks to classify the risks of all their on-balance-sheet and off-balance-sheet financial assets that bear credit risks.

The China Banking and Insurance Regulatory Commission and the People's Bank of China, the country's central bank, jointly issued measures for the classification of commercial banks' financial asset risks on Saturday, with the aim of further promoting banks to accurately identify and assess their credit risks and truthfully reveal the quality of their assets.

Currently, banks are required to classify their loans into five categories ranging from "normal" to "loss". Starting from July 1, the scope of banks' financial assets to be classified will also include bond investments, interbank lending and off-balance-sheet assets.

In addition, the regulators have required commercial banks to focus on assessing debtors' ability to perform their contractual obligations while banks are classifying risks of non-retail banking financial assets.

For example, if more than 10 percent of the amount of money that a debtor owes to a bank is classified into nonperforming assets, all of the money that the debtor owes to the bank should be classified into NPAs.

According to the new rules, for loans which are more than 90 days overdue, even if the collaterals are sufficient, banks should still classify the loans into nonperforming assets.

China will start implementing the measures on July 1. For new business occurring on July 1 and later, banks must classify financial asset risks according to the new requirements. For business occurring before July 1, banks should reclassify financial asset risks step by step before Dec 31, 2025.