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Banks must properly classify their their loans and non-credit assets to help ward off potential risk, the banking regulator said.

Domestic policy banks, State-owned commercial banks, joint-stock commercial banks and city commercial banks had already adopted the five-category classification standard for their loan assets, the China Banking Regulatory Commission said.

"But the overwhelming majority of banks have yet to examine their non-credit assets in line with the five-category standard, making it hard to assess risks," the regulator said in the statement published on its Web site www.cbrc.gov.cn.

And even though the system had been adopted for credit, some bank branches had secretly "relaxed the implementation of the loans classification standard and even adjusted results to conceal the real asset quality," the bank regulator said.



Banks "must beef up their work on implementing of the five-category classification standard and treat it as an important task to help lower non-performing loans (NPLs)," it said.



The commission, set up in 2003, has been trying to implement a loan classification system stricter than what the banks have been using. The system, using five categories of risk, is aimed at minimising new bad debt in the sector.



Domestic commercial banks managed to cut their bad loan ratios by an average 0.5 percentage point in the first three months to 12.4 percent, while their outstanding NPLs fell 3.56 billion yuan to 1.83 trillion yuan, the regulator has said.



China Development Bank, Export-Import Bank of China and China Agricultural Development Bank of China are the country's three policy banks, which lend in line with State directives.



The Big Four State-owned commercial banks are Bank of China, China Construction Bank, Industrial and Commercial Bank of China and Agricultural Bank of China while banks with non-state shareholders include Bank of Communications and China Merchants Bank .



China has been trying to improve risk controls and corporate governance at its banks, many of which are looking for tie-ups with overseas banks and listings as part of efforts to become sound entities capable of taking on growing competition.



Foreign banks will get wider access to the domestic banking market in late 2006, according to World Trade Organization rules.