China has selected certain financial institutions to participate in a trial program to buy and sell banks' non-performing loans, in an effort to streamline the process of handling commercial banks' ballooning bad debt.
The China Securities Regulatory Commission revealed the trial program in January, aiming to use securitization and transfers of non-performing assets to help commercial banks deal with its mounting bad debt.
The group of financial institutions selected include unnamed banks and trust companies, which have begun asset transfers of non-performing loans, according to Caixin Media citing insiders with knowledge of the matter.
Chinese banks have previously structured wealth management companies to take some of its non-performing loans off their books. The trial program aims to bring transparency and market principals to how banks manage their bad loan book.
Banks are prohibited to purchase assets from its own books via subsidiaries or other hidden means. Non-performing loans are to be transferred by itself, not as part of a larger asset pool that includes both non-performing and regular debt. Individual investors are banned in participating in these asset transfers.
According to the Caixin Media article, the Chinese regulators favor trust companies as the preferred entity to purchase bank non-performing loans.