NPL Disposal in China Han Bin May 2005

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NPL Disposal in China Han Bin May 2005

Contents Part I Fundamentals Part II AMC Operation Part III Case Study Part IV Prospect 1

Part I Fundamentals Ø Ø Definition of NPL Status of NPL The AMCs Methods of NPL Disposal 2

Part I Fundamentals Ø Definition of NPL Ø Five categories of risk classification of loans: Standard, Special mention, Sub-standard, Doubtful, Loss 3

Part I Fundamentals Ø Status of NPL Ø NPLs in all Banks By the end of 2002: RMB 2. 6 trillion, 19. 9% By the end of 2003: RMB 2. 4 trillion, 15. 2% By the end of 2004: RMB 1. 8 trillion, 12. 9% By the end of first quarter 2005: RMB 1. 8 trillion, 12. 4% 4

Part I Fundamentals Ø Status of NPL Ø NPLs in the Asset Management Corporations ( Huarong, Great Wall, Orient, Cinda ) Acquired in 1999 -2000: RMB 1. 4 trillion Acquired in 2003 -2004: RMB 0. 5 trillion 5

Part I Fundamentals Ø The AMCs Ø Establishment: 1999 Ø Purpose: To improve asset quality of the stateowned banks, hedging and avoiding financial crisis; To promote loss relief and restructuring of the state-owned enterprises. Ø Registered capital: RMB 10 billion each AMC 6

Part I Fundamentals Ø Methods of NPL Disposal Ø Banks: collection, lawsuit, portfolio sale Ø AMCs: Ø collection, lawsuit, portfolio sale Ø debt restructuring Ø debt-equity swap Ø joint venture Ø securitization, etc. Ø 7

Part II AMC Operation Ø Ø Assets acquired from Banks Supportive Policies Status of NPL Disposal Problems and Possible solution 8

Part II AMC Operation Ø Assets acquired from banks Ø Huarong: Ø Great Wall: Ø Orient: Ø Cinda: RMB 407. 7 billion (1999 -2000) RMB 345. 8 billion (1999 -2000) RMB 271. 4 billion (1999 -2000) RMB 124. 2 billion (2003 -2004) RMB 394. 5 billion (1999 -2000) RMB 56. 9 billion (2003 -2004) RMB 278. 7 billion (2003 -2004) 9

Part II AMC Operation Ø Supportive Policies Ø Financing: Issuing bonds, borrowing re-financing Ø Management: established procedures Ø Authorization: full right to recognize loss Ø Tax and administrative fees: exempted Ø Foreign participation: encouraged Ø Assessment: target and bonus on cash recovery 10

Part II AMC Operation Ø Status of NPL Disposal ( as of the end of first quarter 2005 ) Ø Huarong: Ø Great Wall: Ø Orient: Ø Cinda: D. R. 75% / 38%, C. R. R. 14% D. R. 62% / 49%, C. R. R. 10% D. R. 57% / 18%, C. R. R. 9% D. R. 68% / 20%, C. R. R. 13% NB: D. R. =Disposal Ratio; C. R. R. =Cash Recovery Rate. ( for assets acquired in 1999 -2000 only ) 11

Part II AMC Operation Ø Problems and Possible solution Ø Problems social creditability Ø difficulty in pricing Ø lack of judicial protection Ø moral hazard Ø Possible solution Ø legislature Ø corporatize AMCs Ø 12

Part III Case Study Ø Ø Case 1: Portfolio Sale through Bidding Case 2: Securitization Case 3: Auction Case 4: Enterprise Restructuring 13

Part III Case Study Ø Case 1: Portfolio Sale through Bidding Ø AMC: Huarong Ø Time: November 2001 Ø Assets: NPL amounting to RMB 10. 8 billion Ø Method: Invitation for Public Bidding Ø Highlight: Foreign Participation 14

Part III Case Study Ø Case 2: Securitization Ø AMC: Huarong Ø Time: June 2003 Ø Assets: NPL amounting to RMB 13. 3 billion Ø Method: Asset-backed Beneficiary Certificate Ø Highlight: Pilot case in domestic market 15

Part III Case Study Ø Case 3: Auction Ø AMC: Great Wall Ø Time: October 2002 Ø Assets: NPL amounting to RMB 19. 8 billion Ø Method: Auction Ø Highlight: One-month-long operation 16

Part III Case Study Ø Case 4: Enterprise Restructuring Ø AMC: Cinda Ø Time: March 2000 - June 2003 Ø Assets: NPL amounting to RMB 178 million Ø Method: debt and equity restructuring Ø Highlight: Double win 17

Part IV Prospect Ø Banks: Ø Control of new NPLs Ø Disposal of NPLs in stock Ø AMCs: Ø Corporatization Ø Specialization Ø Diversification 18

Thank You 19

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