1. NPL Disposal in China NPL Disposal in China Han Bin Han Bin May 2005

2. 1 Contents Contents Part I Fundamentals Part II AMC Operation Part III Case Study Part IV Prospect

3. 2 Part I Fundamentals  Definition of NPL  Status of NPL  The AMCs  Methods of NPL Disposal

4. 3 Part I Fundamentals  Definition of NPL  Five categories of risk classification of loans: Standard, Special mention, Sub-standard, Doubtful, Loss Standard, Special mention, Sub-standard, Doubtful, Loss

5. 4 Part I Fundamentals  Status of NPL  NPLs in all Banks By the end of 2002: RMB 2.6 trillion, 19.9% 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 2003: RMB 2.4 trillion, 15.2% By the end of 2004: RMB 1.8 trillion, 12.9% By the end of 2004: RMB 1.8 trillion, 12.9% By the end of first quarter 2005: By the end of first quarter 2005: RMB 1.8 trillion, 12.4% RMB 1.8 trillion, 12.4%

6. 5 Part I Fundamentals  Status of NPL  NPLs in the Asset Management Corporations  ( Huarong, Great Wall, Orient, Cinda ) Acquired in 1999-2000: RMB 1.4 trillion Acquired in 1999-2000: RMB 1.4 trillion Acquired in 2003-2004: RMB 0.5 trillion Acquired in 2003-2004: RMB 0.5 trillion

7. 6 Part I Fundamentals  The AMCs  Establishment: 1999  Purpose: To improve asset quality of the state- owned banks, hedging and avoiding financial crisis; To promote loss relief and restructuring of the state-owned enterprises.  Registered capital: RMB 10 billion each AMC

8. 7 Part I Fundamentals  Methods of NPL Disposal  Banks:  collection, lawsuit, portfolio sale  AMCs:  collection, lawsuit, portfolio sale  debt restructuring  debt-equity swap  joint venture  securitization, etc.

9. 8 Part II AMC Operation  Assets acquired from Banks  Supportive Policies  Status of NPL Disposal  Problems and Possible solution

10. 9 Part II AMC Operation  Assets acquired from banks  Huarong: RMB 407.7 billion (1999-2000)  Great Wall: RMB 345.8 billion (1999-2000)  Orient: RMB 271.4 billion (1999-2000)  RMB 124.2 billion (2003-2004)  Cinda: RMB 394.5 billion (1999-2000)  RMB 56.9 billion (2003-2004)  RMB 278.7 billion (2003-2004)

11. 10 Part II AMC Operation  Supportive Policies  Financing: Issuing bonds, borrowing re-financing  Management: established procedures  Authorization: full right to recognize loss  Tax and administrative fees: exempted  Foreign participation: encouraged  Assessment: target and bonus on cash recovery

12. 11 Part II AMC Operation  Status of NPL Disposal  ( as of the end of first quarter 2005 )  Huarong: D.R. 75% / 38%, C.R.R. 14%  Great Wall: D.R. 62% / 49%, C.R.R. 10%  Orient: D.R. 57% / 18%, C.R.R. 9%  Cinda: 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 )

13. 12 Part II AMC Operation  Problems and Possible solution  Problems  social creditability  difficulty in pricing  lack of judicial protection  moral hazard  Possible solution  legislature  corporatize AMCs

14. 13 Part III Case Study  Case 1: Portfolio Sale through Bidding  Case 2: Securitization  Case 3: Auction  Case 4: Enterprise Restructuring

15. 14 Part III Case Study  Case 1: Portfolio Sale through Bidding  AMC: Huarong  Time: November 2001  Assets: NPL amounting to RMB 10.8 billion  Method: Invitation for Public Bidding  Highlight: Foreign Participation

16. 15 Part III Case Study  Case 2: Securitization  AMC: Huarong  Time: June 2003  Assets: NPL amounting to RMB 13.3 billion  Method: Asset-backed Beneficiary Certificate  Highlight: Pilot case in domestic market

17. 16 Part III Case Study  Case 3: Auction  AMC: Great Wall  Time: October 2002  Assets: NPL amounting to RMB 19.8 billion  Method: Auction  Highlight: One-month-long operation

18. 17 Part III Case Study  Case 4: Enterprise Restructuring  AMC: Cinda  Time: March 2000 - June 2003  Assets: NPL amounting to RMB 178 million  Method: debt and equity restructuring  Highlight: Double win

19. 18 Part IV Prospect  Banks:  Control of new NPLs  Disposal of NPLs in stock  AMCs:  Corporatization  Specialization  Diversification

20. 19 Thank You