Chinese Business Review, ISSN1537-1506, USA
Causes and solutions of non-performing loan in Chinese commercial banks GUO Ning-ning
(Jiangsu Branch, Bank of China, Nanjing 210005, China)
Abstract: Non-Performing Loan (NPL) is one of the concrete embodiments of credit risk which banks take. NPL is a huge puzzle for Chinese commercial banks, so how to enhance risk management to improve assets quality and lower down NPL are of great importance to those banks. Key words: NPL; Chinese commercial banks; causes; solutions
1. Analysis on causes of NPL in commercial banks
There is so-called “4-3-3” distribution for the causes of formation of corporate customers’ NPL from actual practice, i.e. non-standardized outside circumstance factors account for 40%, enterprises’ undeveloped inside operation management factors account for 30%, and banks’ extensive inside operation management factors, which are the emphasis of analysis in this paper, account for 30%. 1.1 Non-standardized outside circumstance is the primary factor of formation of NPL During the shift from planned economy to market economy, Chinese banks are affected badly by outside circumstance, for example, national policies, behavior of local governments and social credit environment, and they commit great cost for social development, economic mechanism reform and economic structure adjustment. A great deal of enterprises take the advantage of the shift to escape or abolish the bank debts, especially at the end of 1990s, through bankrupting, spinning off, merging and other various methods. 1.2 Enterprises’ undeveloped inside operation management is the main factor of formation of NPL Ever since a long time ago, many Chinese enterprises have been troubled by inflexible operation mechanism and management confusion. Some enterprises lack accurate judgment for the trend of market and enlarge production scale in hot industries without any consideration, which lead to serious imbalance in supply and demand; some projects even go out of production during construction. And some enterprises enter funding circulation outside the bank system to escape monitoring, through measures of opening many accounts in different banks, paying cash just after received without booking. The above factors make it difficult to reclaim loans for banks and evolve into NPL. 1.3 Banks’ extensive inside operation management is the important factor of formation of NPL In practice, the operation mechanism, credit culture and management skills are much more influential than operational performance level, so it is important to analyze carefully on banks’ internal operation management to improve credit risk management and assure sustainable healthy development. 1.3.1 Unsound operation mechanism 22.214.171.124 Inaccurate market orientation There is a long history for inaccurate market orientation in China. During the planned economy period, banks GUO Ning-ning, Deputy General Manager of Jiangsu Branch, Bank of China, Ph.D. of Economics, Tsinghua University; research fields: risk management of commercial banks, financial risk analysis. 13
Causes and solutions of non-performing loan in Chinese commercial banks
only followed national plans and didn’t need any own development strategy and market orientation, so they lacked market orientation capability, had vague business development ideas, and often operated following the others. For instance, during the real estate industry fever in 1990s and steel industry fever in the late of 2003, many banks fanatically stepped into these industries and incurred huge loss later. 126.96.36.199 Weak internal control, lack effective control on moral hazard Banks with no sound internal control system are facing great moral hazard risk, because of the imperfect social credit environment and law environment. 188.8.131.52 Too much emphasis on market share and asset scale, no strict admittance and no active exit Under the influence of ideas of...