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TABLE OF CONTENTS CHAPTER I GENERAL PROVISIONS CHAPTER II WITHDRAWAL OF RESERVE FOR NON-PERFORMING DEBTS CHAPTER III FINANCIAL TREATMENT CHAPTER IV SUPPLEMENTARY PROVISIONS CHAPTER I GENERAL PROVISIONS Article 1. These Measures are formulated for the purposes of preventing operational risks, strengthening financial enterprises' abilities to resist risks, precisely computing the losses and incomes, and promoting the steady operations and healthy development of the financial enterprises. Article 2. The "financial enterprises" as mentioned in the these Measures refers to the financial business enterprises registered within the territory of the PRC upon approval of China Banking Regulatory Commission such as policy banks, commercial banks, trust investment companies, finance companies, financial leasing companies, urban and rural credit cooperatives, excluding the financial asset management companies. Article 3. The "reserves for nonperforming debts" as mentioned in these Measures refers to the non-performing debt reserves set aside for the risks and losses of creditor's rights and equity assets, including the general reserves and the relevant assets depreciation reserves. The "general reserve" as mentioned in these Measures refers to the reserve withdrawn from the net profit at a certain percentage for making up the possible losses not yet identified. The "asset depreciation reserve" as mentioned in these Measures refers to the special losses reserve withdrawn by a financial enterprise from the difference between the estimated amount of refundable creditor's rights and equity assets and their book value, including the reserves for loan losses, bad debts and long-term investment depreciation, among which the "reserve for loan losses" refers to the reserve withdrawn by a financial enterprise for the losses that might be incurred on various loans and the "reserve for bad debts" refers to the reserve withdrawn by a financial enterprise for the losses that might be incurred on various receivables. CHAPTER II WITHDRAWAL OF RESERVE FOR NON-PERFORMING DEBTS Article 4. A financial enterprise shall withdraw non-performing debt reserves for the risks and losses of the assets it might face, including loans (including mortgaged, pledged and guaranteed loans), bank card overdrafts, discounts, advance payments of credit (including bank advance payments for draft acceptance, LC, guaranties, etc.), import and export bills of exchange, equity investments and debt investments (excluding the securities investments of which the final value is determined by adopting the lower of cost or market price method or fair value method, and the principal and interests of government bonds purchased by a financial enterprise), inter-bank borrowing (lending), inter-bank deposits, receivable interests (excluding the receivable interests of loans and inter-bank lending), receivable dividends, receivable rent and other receivables. A financial enterprise shall also establish a bad debt reserve for the onlending foreign loans, including loans from international financial organizations, credits granted by foreign buyers, foreign government loans, unconditional loans of Japanese International Cooperation Bank, mixed loans of foreign governments, for which it bears the repayment liabilities. A financial enterprise does not have to set aside bad debt reserve for any entrusted loans, of which it does not bear the risk. Article 5. A financial enterprise shall, by the end of each year, withdraw a general reserve at a certain percentage according to the risks it bears and the balance of losses on assets. In determining the percentage for the withdrawal of general reserve, it shall take the risks and other factors into full consideration. In principle, the balance of general reserve shall not be less than 1 % of the final balance of the risk assets. The general reserve shall be withdrawn and managed by the headquarters (head office) of the financial enterprise in a centralized manner. A financial enterprise shall check its various creditor's rights and equity assets on the quarterly basis, shall analyze the possibility of repayment and shall, in compliance with the principle of prudence, reasonably estimate the possible losses on various assets. As to the possible loan losses, it shall withdraw a reserve for loan losses; as to the possible bad debts, a reserve for bad debts; and to the long-term investment losses, a long-term investment depreciation reserve. Article 6. The scope for the withdrawal of loan losses reserve shall be limited to the loans (including mortgaged, pledged and guaranteed loans), bank card overdrafts, discounts, advance payments of credit (including bank advance payments for draft acceptance, LC, guaranties, etc.), import and export bills of exchange, inter-bank lending and receivable financing rent. The loan loss reserve includes the specialized reserve and specific reserve. The "specialized reserve" refers to the reserve withdraw by a financial enterprise for the special losses according to the extent of losses after this financial enterprise has grouped the risks of loan assets into different categories. The financial enterprise shall reasonably determine the percentages for the withdrawal of specialized reserve according to the risks and the possibility of repayment of the loan assets. The financial enterprise may withdraw a specialized reserve by referring to the following percentages: For the attention category, 2%; sub-level category, 25%; suspect category, 50%; loss category 100%. Among these categories, the reserve for losses of sub-level and suspect assets, the percentages may fluctuate within a range of 20%. The "specific reserve" refers to the reserve withdrawn by the financial enterprise for the loans granted to specific countries, regions or industries, the concrete percentage shall be reasonably determined by the financial enterprise according to the risks and the possibility of repayment of the loan assets. Article 7. The scope for the withdrawal of bad debts shall be limited to the inter-bank deposits, receivable interests of bonds, receivable dividends, receivable operating rent and other receivables. A financial enterprise may, by referring to the Guiding Principle on the Classification of Loan Risks, classify the risks of the assets for which bad debt reserve will be withdrawn, and shall determine the percentages for the withdrawal of bad debt reserve according to the risk classification results as well as the percentages for the withdrawal of specialized reserve for loan losses. When determining the percentage for the withdrawal of bad debt reserve, it shall reasonably take into consideration its past experience, the financial status of the debtor, the volume of cash flow, and other relevant information. Article 8. The scope for the withdrawal of long-term investment depreciation reserve shall be limited to the equity and debt investments (excluding the securities investments of which the final value is determined by adopting the lower of cost or market price method or fair value method, and the principal and interests of government bonds purchased by a financial enterprise). Whether or not to withdraw a depreciation reserve for the long-term investments with market price, it may be decided in light of the following circumstances: (1) The market price lower than the book value has lasted for 2 successive years; (2) The investment dealing has been suspended for 1 year or more; (3) The investment entity has incurred severe losses in the current year; (4) The invested entity has incurred losses for two successive years; (5) The invested entity cannot continue its business operations due to rectification or liquidation or any other reason. Whether or not to withdraw depreciation reserve for the long-term investments without market price, it may be decided in light of the following circumstances: (1) The changes that have an impact on the political and legal environment for the business operation of the investment entity, such as the promulgation of or modification to any tax or trade regulation that may result in huge amount of losses to the invested entity; (2) The market demand has changed because the commodities or labor services provided by the invested entity are obsolete or because the preference of the consumers has changed, as a result, the financial status of the invested entity is seriously worsened; (3) The production technologies of the industry to which the invested entity belongs have undergone great changes, the invested entity has lost competitive ability and its financial status is seriously worsened, e.g. rectification, liquidation, etc.; (4) Other circumstances supported by evidence that the investment is absolutely unable to bring about any more economic benefits. Article 9. A financial enterprise shall timely withdraw the full amount of bad debt reserve according to the extent of the asset risks. If it fails to withdraw the full amount of bad debt reserve, it shall not distribute the after-tax profits. Article 10. The headquarters and each of the branch offices of a financial enterprise shall, within 30 days after the end of each quarter, report the information about the withdrawal of non-performing debt reserve (including the information about the items and classification of the non-performing debt reserves, the asset risk assessment methods, and the percentages for the withdrawal of non-performing debt reserves and their changes) and provide the information about the changes of the balance of the non-performing debt reserves (the figures of the initial period, the current period, carried on at the current period, written off at the current period and the final period) to the competent public finance department. Article 11. The financial supervision commissioners' offices of the Ministry of Finance based in all regions shall supervise and manage the withdrawal of the non-performing debt reserves by the branches of the financial enterprise directly under the Central Government. They shall timely stop and correct those that fail to withdraw the full amount of non-performing debt reserves. CHAPTER III FINANCIAL TREATMENT Article 12. A financial enterprise shall treat the general reserve it has set aside under the relevant provisions as profit distribution. The general reserve is a constituent part of the owner's equity. Article 13. The relevant asset depreciation reserves withdrawn by a financial enterprise shall be incorporated into the incomes and losses of the current period. When the quality of the assets with depreciation reserves has improved, the relevant depreciation reserve shall be reverted and the income of the current period shall be increased accordingly. Article 14. After the approved asset losses that meet the relevant conditions are written off, the relevant asset depreciation reserve shall be offset and deducted. With regard to the receivable on-balance-sheet interests written off upon approval, if they have been incorporated into the computation of profits and losses, no matter their principal or interests is or are overdue, they shall be offset against or be deducted from the interest income. Where any written-off asset loss is recovered, the relevant written-off asset depreciation reserve shall be reverted, of which the part in excess of the principal, including the receivable on-balance-sheet interests and receivable off-balance-sheet interests shall be incorporated into the interest income. The reverted asset depreciation reserve shall be treated as an increase of the income of the current period. Article 15. The asset depreciation reserves shall be withdrawn on the basis of the original currency, that is to say, for the RMB denominated assets, in RMB; for the foreign currency denominated assets, in foreign currency or by converting to US dollars. The RMB and foreign asset depreciation reserves shall be calculated and reflected respectively. CHAPTER IV SUPPLEMENTARY PROVISIONS Article 16. A financial enterprise may work out specific measures of its own according to these Measures and report them to the competent public finance department for archival purposes. Article 17. These Measures shall come into force as of July 1, 2005. If any previous provisions are contrary to these Measures, the latter shall prevail. |
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