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.