The amount of non-performing assets (NPAs) has been increasing among banking financial institutions since 2014. From 2018 to 2022, the total scale of NPAs disposed of by China’s banking industry rose year after year, and amounted to RMB13.6 trillion (USD2 trillion). Additionally, for three years in a row, the amount of non-performing assets disposed of in the banking sector has topped RMB3 trillion.
The market for the disposal of NPAs is rapidly developing.
In 2022, regulatory authorities continually improved the top-level regulatory structure for the disposal of NPAs by commercial banks and clarified the punishment standards for problems arising from practical innovation. The regulatory authorities issued a series of policy documents that accelerates the pace of promoting policies on the disposal of NPAs.
These policy documents encourage and support banks to increase the transfer, disposal and write-off of non-performing loans in accordance with regulations, and to innovate the mechanisms for disposal.
In terms of disposal methods, the management of NPAs is being refined and disposal methods are now more flexible. While traditional disposal methods include legal action for recovery, write-off and mass transfer, commercial banks are now trying to explore more innovative methods like debt restructuring and securitisation of NPAs.
Strong regulation over the industry has become the norm, and regulatory authorities impose stricter monitoring and more severe punishments for the business of NPA disposal. This brings higher requirements on risk management, internal control and compliance management for commercial banks.
To cope with the growing demand for NPA disposal, commercial banks have set up or expanded NPA disposal teams, and strengthened the construction of asset preservation institutions and teams.
FILING AND ENFORCEMENT
The primary task of commercial banks in resolving the major risks of NPA disposal is to control the disposal and the bottom line of systemic risks. However, in practice, there are difficulties in the judicial procedures.
Overall policy regulation. Large-scale risk disposal cases often attract the attention of government authorities and administrative agencies at all levels. National policies, meetings and other actions involving the government’s overall arrangement of policies will actually affect the creditors’ pre-judgment on the development of the case.
Centralised jurisdiction. The purpose of centralised jurisdiction is to maintain a unified standard of adjudication and reduce the burden of litigation. However, for major NPA disposal projects, it may cause a series of problems.
Before a centralised jurisdiction scheme is determined, different local courts or arbitration institutions have different standards for accepting and judging the series of cases of enterprises in question. There are even circumstances where courts have delayed filing, or refused to file a case, because of a wait-and-see attitude.
In addition, after a centralised jurisdiction scheme is determined, courts with jurisdiction are faced with a large number of cases to be filed, and the filed cases to be transferred, which affects the case filing and scheduling.
Strict review. The amount of money and the number of parties involved in cases is often huge. Certain parts of a judicial procedure may involve social stability-related factors, and if this occurs, courts often set strict standards for matters such as filing and preservation. A preservation judge may even conduct a substantive review of a creditor’s claims, which greatly increases difficulty of NPA disposal.
There is the matter of how to manage notifications to debtors left over from the transfer of NPAs, especially from the mass transfer of personal loans.
Although the problem remains to be further refined and clarified, it has been solved to some extend by:
- The promulgation of the Notice by the General Office of the China Banking and Insurance Regulatory Commission of Launching the Second Round of the Pilot Programme of Transferring Non-Performing Loans on 30 December 2022; and
- The issuance of supporting documents such as the Frequently Asked Questions on Non-Performing Loan Transfer at the Banking Credit Assets Registration and Circulation Centre.
Article 3 of the above-mentioned notice clearly states that the transferor of non-performing loans should take reasonable measures to notify debtors (including security providers) of the transferor of these loans in time, after the transfer of the loan, and the transferor’s notification obligation may be deemed to be fulfilled when the debtor is clearly aware of the transfer.
For out-of-contact debtors, the notification obligation may be fulfilled by a public announcement. The transferor should keep these materials to prove that the notification obligation has been fulfilled.
The introduction of a public announcement greatly facilitates the performance of the notification obligation, improves the efficiency of the personal non-performing loan transfer, and unifies the identification standards for local courts with a view to help solve the difficulties in filing a case. However, the authors have also noticed that the notice only provides for the performance methods that the transferor may choose for the notification obligation.
Article 546 of the Civil Code does not actually prohibit a transferee from giving the notice but, in practice, it is more reasonable and common to have the transferor send notice to ensure the security of transferring the creditor’s rights, and not to excessively increase the debtor’s review obligation.
However, in some situations, a bank that is the transferor may have difficulties in notifying debtors. At this time, for the efficiency and security of the creditors’ rights transfer, and to safeguard the legitimate rights and interests of the transferee, it is suggested that the transferee be allowed to perform the notification obligation by reference to the relevant provisions of the notice, if the transferee can provide sufficient evidence to prove the fact of the transfer of creditors’ rights.
Further provisions should be made on the specific form and display method of the documents provided by the transferee to prove the transfer of creditors’ rights.
Yao Xiaomin is a partner and Xue Yuan is an associate at Lantai Partners
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