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Effects of Chinas Non-performing Loans On Banking Financial Statement and Financial Statistics 10 Overview of NPL in China 9679 NPL definition As a matter of fact there were no so-called NPLs in the minds of Chinese bankers until 1996 The Loan Rule formulated by the Peoples Bank of China in 1996 stipulated that there were three types of NPLs overdue doubtful and bad This approach underestimated NPLs as it did not include highly risky loans that were still payinginterests and were not yet overdue Lardy 1998 suggests other reasons why the NPL problem might be underestimated in the old Chinese system Bank accounting and auditing practices in China have severe shortcomings external auditing was not a common practice until very recently Apart from NPLs banks often have substantial non-performing assets that are not reported Finally because the data on NPLs exclude interbank and trust lending as well as credit that is concealed in balance sheets as other items they may underestimate significantly the total amount of non-performing assets In 1998 China adopted the international standard loan classification scheme that consists of five categories normal pass special mention substandard doubtful and loss unrecoverable Reclassification of loans using the international standard was completed in the four large SOBsState owned banks by July 1999 9679 History The non-performing loans NPLs1 of Chinas banks in particular state-owned banks and entrust investment companies mainly accumulated in the period of 1992-1997 during which China experienced first a high inflation and then a contraction At the end of 1997 NPLs accounted for 35 percent of the total outstanding loans of financial institutions as a whole Foreign analysts estimate that the bad loan ratio of Chinese banks is about 50 or twice the official estimate 9679 Causing factors The rapid accumulation of NPLs during that period was caused by the following factors 1 the Agricultural bank of China lent a lot of policy loans to purchase
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