On Forming Mechanism And Prevention Measure Of None-Performing Loan Of State-Owned Commercial Banks

NPL (None-Performing Loan) problem is a hard nut to crack forState-Owned Commercial Banks. As official statistical data showed, theNPL rate of State-Owned Commercial Banks has been around 30% since the1990s, nearly 40% in some years. Chinese government has realized theimportance of the issue and adopted many measures to solve it. Thegovernment injected 270 billion RMB national debts to complement thedeficiency of bank capital in 1998, established four Asset ManagementCompanies to peel off NPL from commercial banks in 1999, and in 2004made use of 45 billion USD foreign exchange reserves to fill the gap of bankcapital for China Construction Bank and Bank of China. Thesegovernmental moves induced considerable economic costs and social costs.Moreover, State-Owned Commercial Banks enhanced their efforts ondisposing and avoiding NPL, finally achieved distinguished effect. By theend of 2005, the NPL rate of State-Owned Commercial Banks has beenreduced to 10.49%.The decline of the NPL rate conduces to changing system and going toIPO reform. Currently, State-Owned Banks set up the modern managementstructure of financial enterprise. Nevertheless, the formality establishment ofjoint-stock enterprises can not represent the final victory of share holdingreform. If State-Owned banks do not reinforce internal control, consummateencouraging and restraining mechanism, the modern management structureof financial enterprise can not take profound effect and the NPL issue cannot be thoroughly cured.The first part of this thesis mostly introduced related concepts andsignificance of this topic. NPL refers to loans, which borrowers fail to payback at promissory time plighted in loan contracts including principal andinterest, or which is recognized that borrowers fail to pay back at promissorytime plighted in loan contracts including principal and interest. Since 2002,China's banking industry has executed Loan Five Class ClassificationManagement Method, which is turned out to be superior over Four ClassClassification Management Method on reflecting current situation of NPL inChina and participating in global competition. Bad asset is a broader conceptthan NPL, but the data of NPL are more accessible and accurate. Therefore,it is feasible to focus on NPL in this thesis. Too many bad loans may imperilthe functioning of national economy, impact social credit mechanism, allaynational tax income, and induce inflation. Especially in China, ifState-Owned Commercial Banks cannot effectively deal with NPL issue, theshare holding reform is likely to fail and endanger national economy.With colligating treatment in recent years, the NPL problem ofState-Owned Commercial Banks showed a positive change on data. But it isfar from being optimistic if the separation operation is considered in.Chapter two of this thesis quoted a great deal of data to introduce the currentsituation of NPL. The NPL amount ascended in 2004 and 2005, consideringseparation operation. A big proportion of NPL reducing was caused by theincrease of the gross quantity of loans. It is easy to see from the data that inthe reforming process, the inducing factor of NPL still exists. The problemcould not be solved only by formality reforming. Considering in China'sspecial economic environment, the problem presents some characteristicsacross industries, area and in its initialized time. The consuming NPL isincreasing gradually with the improvement of life standard and thoughtschanged.State-Owned Commercial Bank shows the distinct variety after thesharing reform. The distinct variety is from whole state holding to multipleholding. Other sharing holders will apply their influence in share holders'meeting, board of director and supervising board to constraint the operationof state by transferring stocks. Because of the constraint, the governmentwill reduce its monopoly in operation, and the actual proprietor absencewould also get a certain improvement because of multiple holding. Hugeassets, a great deal of operating organization and employee intriguedcomplicated Principal-Agent relations. The inner causes of NPL were notgot rid of. In the third chapter, a static game model was set up. The modelset loan agent and supervisors as random parameters to analyze the innercauses of NPL. The cures were proposed. Enhancing supervision,consummating the penalty and award mechanism, reducing supervisingcosts and keeping tracing small amount loans are considered to be goodsolutions. In outer surrounding, the business cycle, the mature degree ofcapital market and the credit level of society also affect NPL level. Theordinary least square method showed the negative relation between GDP andNPL. The undeveloped capital market caused the deficiency of loanresources. The risk of loans accumulated in four State-Owned CommercialBanks. Also, the faultiness of social credit system induced more moral riskon loan.Based on the analysis in chapter three, the policy advices wereproposed considering China's national conditions. Consummating internalcontrol system, enhancing supervising and paying attention to theimportance of audit are necessary. First thing is to break down Bureaucracyfrom conception. Secondly an awarding mechanism should be set up tocorrelate the income with performance. Thirdly it is important to buildrestriction mechanism to trace the ultimate responsible loaner. Academicconsulting department are needed to be set up to forecast the economic trend.State-Owned Commercial Banks should analyze and master nationalindustry policy and loan policy to prevent the hurts from unpredictablebusiness cycle. Innovative financial production, mature stock market andbond market are required to establish more loan resources and reduce loanrisks. The government should build developed social credit system. Also, theenterprise and public should set up good credit concept and make well use ofthe function of credit agency.