What Is a Subordinated Loan?

The five-tier classification of loans refers to the five-tier classification of loan quality based on the actual repayment ability of the borrower. That is, loans are divided into five categories according to the degree of risk: normal, concerned, substandard, suspicious, and loss. The latter three are non-performing loans. In May 1998, the People's Bank of China formulated the "Guiding Principles for the Classification of Loans" with reference to international practices and in combination with China's national conditions.

Five classifications of loans

Prior to 1998, the loan classification method of Chinese commercial banks basically followed the provisions of the "Financial Insurance Enterprise Financial System" promulgated by the Ministry of Finance in 1993 to classify loans into four types: normal , overdue , sluggish , and bad debt . Called

Classification criteria for corporate loans and other loans to natural persons

Rural cooperative financial institutions are fully analyzing the borrowers to return in full and on time.

Starting from 2004, two types of banks, wholly state-owned commercial banks and joint-stock commercial banks, will adhere to international standards, cancel the original parallel four-tier classification system for loans, and fully implement the five-tier classification system. ^[1]

The five-category loan classification system divides commercial loans into five categories: normal, concerned, substandard, suspicious, and loss based on the inherent risk level. This classification method is mainly based on the repayment ability of the borrower, that is, the actual ability to eventually repay the loan principal and interest, to determine the risk of loss of the loan. The latter three categories are called non-performing loans. Prior to the four-tier classification system of loans, loans were classified as normal, overdue, sluggish, and bad debt.

The five-level classification is a recognized standard for the quality of bank loans by the international financial industry. This method is based on dynamic monitoring. Through continuous monitoring and analysis of borrower cash flow, financial strength, collateral value and other factors, judgments are made. The actual loss of the loan. In other words, the five-level classification no longer judges loan quality based on the term of the loan, and can more accurately reflect the real situation of non-performing loans, thereby improving the bank's ability to resist risks.

Previously, the classification of non-performing loans in banks was "one more than two" (overdue loans refer to loans that were not repaid when the loan contract expired, sluggish loans refer to loans that were overdue for more than one year and have not been repaid, and bad debt loans refer to (Recovered loan), which is an ex-post supervision and management method based on the term of the loan. The shortcoming of "one more than two stays" is to conceal many problems in bank loan quality. For example, assessing the loan quality based on the maturity of the loan will cause the phenomenon of borrowing new and repaying the old. This makes it easy to turn a non-performing loan into Normal loans without actually reducing risk. This classification is difficult or even impossible to improve the quality of credit assets, and the five-class classification has overcome its related weaknesses and can reflect the profit and loss status of commercial banks in a timely manner. Therefore, it has become an option to improve the quality management of loans.

The five-level classification of loans only provides a classification method of loans, which is inconsistent with the risk-based classification method. Therefore, the term five-level classification of loan risks is wrong. ^[4]