THE banking sector will soon adopt a standard for classifying performing and non-performing loans, greatly enhancing the banking supervisor's ability to assess the sector's bad-debt situation. Hong Kong Monetary Authority deputy chief executive (banking) David Carse said a consultation paper would be issued to banks to set out the categories used for performing and non-performing loans and their respective definitions. ''A sectoral breakdown of bad-debt provisioning will also be requested in the consultation paper to be released next week,'' he said, explaining that banks' exposure to various economic sectors was useful information for prudential supervision. The authority will draw reference from the loan classification criteria currently used in the US, which divide loans into three types: performing, special mention and non-performing. Those classified as special mention are loans with some defects, and are likely to deteriorate into non-performing loans. Non-performing loans are sub-divided into three types - sub-standard, doubtful and loss. Banks are currently using their own classification criteria which are not comparable, making it difficult, if not impossible, for the authority to assess the bad-debt situation of the whole industry. The new regime on loan classification, to be incorporated into banks' quarterly statistical returns to the authority, will empower the authority's off-site monitoring of banks' asset quality. Despite the low bad-debt level in the industry, now running at 0.25 per cent of total loans, the new system will provide a supplementary measure for monitoring, apart from on-site examinations. Mr Carse said although a uniform set of loan classifications would be used, standards of bad-debt provisioning would not be mandated. ''We are not breaking new ground; we are just using the fairly standard system that is used in the US. It is an anomaly that Hong Kong does not have a similar system,'' he said.