Article 1 The guidance hereunder is formulated with a view to enhancing the capabilities of banks in forestalling risks, to carrying out exactly accounting of operation profits and losses and to maintaining sound operation and sustainable development.
Article 2 Banks shall reasonably estimate possible loan loss and timely set aside provisions for loan losses in accordance with the prudent accounting principle. Provisions for loan losses include general, special and specific reserves.
General reserves are funds set aside based on a certain percentage of the total loans outstanding and used for covering unidentified possible loan loss. Special reserves are funds set aside based on the ratio of the loss to the whole amount after the risk-based classification in line with The Guidelines of Risk-based Classification of Loans and used for covering special losses. Specific reserves are funds set aside covering losses out of risks of a state, region, an industry or a type of loans.
Article 3 The base for provisioning of loan losses refers to the assets that are to incur risks and losses, including loans (mortgaged, pledged or guaranteed loans), overdrafts on bank cards, discounts, advance payments for banker's acceptance drafts, letters of credit and guarantees, trade finance for inward and outward bills, and call loans etc.
Article 4 Banks shall set aside the general reserves on quarterly basis, and the general reserves outstanding as of the end of the year may not be less than 1% of the loans outstanding. The general reserves set aside by banks shall be included in their subordinated capital in calculating the capital adequacy ratio in line with related provisions of The Basle Accord.
Article 5 Banks may set aside special reserves on quarterly basis by consulting and following the following percentages: the provision is set aside for loans to be watched by 2%, that for substandard loans by 25%, that for doubtful loans by 50%, that for loss loans by 100%. Among them, provisions for losses of substandard and doubtful loans may be set aside with a range of 20%.
Article 6 Specific reserves may be set aside by banks in their discretion on quarterly basis by a percentage determined according to the specific risk scenario of loans of various types (eg. various states or industries), probability of losses and historical experience.
Article 7 Provisions for loan losses shall be set aside by head offices of banks in a unified way.
Branches set up by foreign banks and domiciled in the People's Republic of China may set aside the general reserves by their head offices in a unified way while the branches may set aside special reserves by themselves respectively.
Article 8 Banks shall institute the prudent system of provisioning for loan losses based on risk-based classification of loans.
(I) Banks shall establish the system of identifying loan risks, and classify loans regularly in line with the requirements of risk-based classification in a bid to identify risks of loans and evaluate the internal risks of loans.
(II) Banks shall establish the system of assessment on provisions for loan losses, assess on regular basis the adequacy of the provisions for loan losses based on risk-based classification and timely set aside provisions for loan loss, with a view to conforming to the assessment of the internal losses, to carrying out exactly operation profits and losses and to reinforcing the capability of forestalling risks.
(III) Banks shall establish the system of write-off of loan losses to timely write off loss loans or the loss part of the loans. Strict systems of examination and approval shall be established for the write-off of the loan losses. Banks shall retain their rights of recourse to the loss loans that have been written off.
Article 9 Provisions shall be set aside adequately in accordance with the risk scenario of loans. Where provisions for losses haven't been set aside adequately, after-tax profit distribution may not be carried out.
Article 10 Financial accounting and taxation of provisions for loan losses shall be carried out in line with relevant provisions of the state.
Article 11 Banks shall report regularly to the PBC in accordance with its requirements on 5-grade classification of loans, provisioning for loan losses and write-off of loss loans.
Article 12 Banks shall disclose data on their provisioning for and write-off of losses in line with relevant provisions.
Article 13 The PBC shall carry out field or non-field examinations on risk-based classification of loans and corresponding provisioning for loan losses and assess the adequacy of provisions for loan losses.
Article 14 The Guidance is applicable for all banking institutions approved by the PBC and established and domiciled in the People's Republic of China, including domestic-funded commercial banks, joint-stock banks with Chinese and foreign capital, wholly foreign-funded banks and branches of foreign banks.
Policy banks may consult and follow The Guidance. Relevant rules will be put into force after the approval of the Ministry of Finance.
Article 15 The Guidance shall be implemented as of January 1, 2002.
s
