Rural Credit Union Loan Five-Level Classification Operation Manual

Author: Zhang Gongping
Publisher:
Publishing Date: 2004-08-01
Features: Just as the development of any new thing follows a gradual process of recognition and acceptance, the implementation of loan five-level classification has also undergone a gradual process of being gradually understood and adopted. When the new credit management method of loan five-level classification was presented to rural credit unions, the management and supervision personnel of rural credit unions, whether in terms of thinking or behavior, seemed to enter an unfamiliar field, accompanied by various doubts: What problems does loan five-level classification solve? Do we have the conditions and capabilities to implement it? Can the various levels of loan five-level classification make appropriate judgments? The arduous journey of state-owned commercial banks in implementing loan five-level classification for seven years, and the fact that most of the early pilot rural credit unions since 1998 abandoned the program halfway through, further slowed down the implementation of loan five-level classification. At the recent joint training session on advanced banking supervision held by the China Banking and Regulatory Commission and the Hong Kong Monetary Authority, I had the opportunity to hear detailed introductions to foreign credit management practices from domestic and international financial experts. What impressed me most was that while we were hesitating and wavering about implementing loan five-level classification in rural credit unions, foreign countries had made new progress and qualitative leaps. They had transitioned from a simple general five-level classification to a more multi-layered classification, from initial term classification to a combination of quantity, term, and judgment analysis, and had further moved on to more advanced methods such as using quantitative statistical analysis models for classification. Now, it appears that in the context of the continuous development and evolution of loan classification in developed countries abroad, our work is clearly lagging behind.
In October 2003, following the instructions of Chairman Liu Mingkang of the China Banking and Regulatory Commission and Vice Chairman Li Wei, the Commission selected over 40 colleagues from various levels of cooperative financial regulatory departments and grassroots rural credit unions to conduct a pilot program for loan five-level classification in Quanzhou, Fujian. Over the course of nearly 20 days, the participants boldly practiced, actively explored, and worked together to successfully classify thousands of loans, developing a set of operational methods for loan five-level classification that rural credit unions could use. The results demonstrated that the five-level classification system based on the inherent risk level of loans could more accurately and timely predict the security of loans, encourage rural credit unions to establish more scientific and effective internal credit control systems, and help them shorten the transition period from extensive to intensive management. It has also been proven that with persistent efforts, rural credit unions have the conditions and capabilities to fully implement loan five-level classification.
In the fourth quarter of 2003, the China Banking and Regulatory Commission Office successively issued the "Notice on Rural Credit Unions Implementing Loan Five-Level Classification" (Yinjiao Ban Tong [2003] No. 76) and the "Implementation Plan for Rural Credit Union Loan Risk Five-Level Classification (Trial)" (Yinjiao Ban Tong [2003] No. 107), explicitly stating that all rural credit unions in China would comprehensively pilot loan five-level classification starting in 2006. The starting gun has been fired, and facing a thorny path ahead, we need to make a more rational judgment of the current situation.
First, it is essential to correctly recognize the long-term and arduous nature of the loan five-level classification work in rural credit unions. Implementing loan five-level classification imposes higher and more updated requirements on both internal conditions and external environments, but the current reality of rural credit unions does not match the objective requirements of loan five-level classification.
From an internal perspective, rural credit unions exhibit significant gaps in terms of concepts, management, employees, technology, and customer quality. Moreover, rural credit unions are not true market entities, and many loans are not issued based on market principles, making it extremely difficult to measure them using market principles.
From an external perspective, rural credit unions face severe information asymmetry, poor social credit conditions, disordered management systems, and inadequate accounting and tax systems. These factors determine that the loan five-level classification work of rural credit unions cannot fully meet risk management requirements in the short term and will inevitably undergo a long and arduous transition process. Only by establishing a long-term perspective, proceeding step by step, and facing challenges head-on can we truly achieve the transformation of rural credit unions' loan management from term-based to risk-based management. Therefore, during the two-year transition period from now until 2006, the focus should not be on whether the classification methods are perfect or whether the results are entirely accurate, but rather on fully popularizing the five-level classification method, establishing risk management concepts, helping rural credit union employees shift their business thinking in line with market requirements, and gradually exploring a path suitable for rural credit unions through practical experience.
Second, a spirit of pragmatism and innovation must be adopted. Implementing five-level classification requires absorbing and learning from advanced domestic and international experiences while also considering the realities of rural credit unions. It requires accurately grasping the core essence of loan risk classification while inheriting reasonable components of the current loan classification and management system. Therefore, it is necessary to adhere to fundamental principles while closely connecting with practical realities, using a developmental approach to solve problems encountered along the way.
Third, loan five-level classification work must be closely integrated with daily loan management. High-quality classification results depend on establishing complete and accurate loan records, relying on loan officers to conduct regular post-loan inspections and fully understand borrowers' business and financial conditions, ensuring loan personnel are proficient in classification operational skills, and establishing strict and comprehensive loan quality assessment systems. All of these fall under the scope of daily credit management. It can be said that the level of daily loan management directly determines the timeliness, accuracy, and workload of five-level classification. Issues reflected in the classification process and results will also play a positive role in improving daily credit management. Therefore, it is essential to guide rural credit unions in standardizing their daily loan management practices, improving loan management methods, and truly integrating loan five-level classification into loan management. Through daily, incremental efforts, loan five-level classification work can be effectively carried out.
Fourth, regulators must fully leverage their role in guiding and standardizing loan five-level classification work. In its initial stages, loan five-level classification is characterized by high investment, high requirements, and full exposure of risks, and rural credit unions have low enthusiasm for proactive implementation. Therefore, when the deep reforms of rural credit unions have not yet been fully realized and their self-control and self-restraint capabilities are weak, regulatory bodies must take on the responsibility of implementing loan five-level classification, fully utilize regulatory functions, apply regulatory measures, unify standards, requirements, and progress, and vigorously promote it while adhering to the direction of loan risk classification to help rural credit unions quickly complete the transition to loan risk management. On this basis, in line with the prudence principle, loan classification systems with the characteristics of rural credit unions should be gradually established.
"Though the road ahead is long and arduous, I will seek high and low," facing a heavy and arduous task and an increasingly urgent timeline, the current top priority is to seriously carry out training work on loan five-level classification. The purpose of editing this book is to provide readers with a comprehensive understanding and mastery of the basic principles of loan risk classification, the procedures and standards for rural credit unions to implement five-level classification, and the use methods of the four major analytical tools—financial, cash flow, non-financial, and guarantees—as well as post-classification management matters—through theoretical elaborations, practical operations, and case analyses—to meet the needs of training programs across various regions.