The mainland will adopt an internationally accepted loan rating system on January 1, according to state media. The system will require banks to rate loans as either normal, special-mention, sub-standard, doubtful or loss, according to the repayment ability of borrowers. It will enable banks better to monitor the repayment ability of borrowers and to recognise potential risks so they can take measures to curb losses and improve asset quality, China Daily yesterday quoted a People's Bank of China (PBOC) spokesman as saying. Chinese banks have been using a different loan rating system since the 1980s, when the commercial banking system was restored to meet the needs of an emerging market economy. The old system based ratings on whether loans became overdue or how long they had been overdue. The new system is the latest reform since Beijing announced it needed to tackle the banking ills head-on in the aftermath of the Asian financial crisis in 1997. China's loan rating system made it impossible for foreigners to assess the asset quality of banks. Regulators said an overhaul of the mainland's banking sector was needed to help state banks adapt to a fast-changing global environment. PBOC governor Dai Xianglong earlier this year said 25 per cent of China's bad loans, held by the four state banks, were overdue, with 3 per cent non-recoverable. Those numbers are disputed by most foreign analysts who claim non-performing loans make up about 50 per cent, making the banks technically insolvent by overseas accounting standards. The establishment of asset-management companies in 1999 helped to cut the four state banks' bad loans by 10 percentage points last year. About 1.4 trillion yuan (about HK$1.3 trillion) of bad loans were transferred to the asset companies last year.
