To address the banking system's Non-Performing Loan (NPL) problem, the Chinese Government has set up four Asset Management Corporations (AMCs). They were to buy up bad debts of the big four state-owned commercial banks and dispose them off over 10 years, taking a large step towards NPL resolution. But in their first two years, these AMCs have made only a limited contribution to resolution of the NPL problem. They have taken over less than half of the NPLs at the big four banks. In addition, while AMC financing has been less than transparent, it appears to have burdened the People's Bank of China (PBoC) with greater risks to date than the Ministry of Finance (MoF), although there have not been any evident monetary consequences. Under plausible recovery scenarios, the AMC losses would surpass the current financial contributions to the AMCs from both the MoF and the PBoC. Since their cash recoveries have lagged their interest obligations, the AMCs face rising cash flow pressure. In response, the Government is pushing for speedier asset recovery, as is evident in the milestone of the first international NPL auction.

India is going to start the Asset Management Companies (AMCs), which would acquire the bad loans from banks and Financial Institutions (FIs) against issuance of bonds. The Government has recently enacted `The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance, 2002', paving the way for Asset Reconstruction Companies (ARCs)/Asset Management Companies (AMCs).

Under this Act, securitization/reconstruction company can take measures like sale or lease of a part or whole of the business of the borrower, rescheduling of payments of debts, settlements of dues payable by the borrower etc., for the recovery of bad loans. Many Asian economies have also started AMCs to get rid of their bad loans problem. Here we will discuss the Chinese experience on AMCs.

China has started four AMCs in 1999 to solve bad loans problem of its four major state-owned banks (each of the four AMCs pairs up with one of these big four banks in China (see table 1)). These four banks hold around 65% of loan portfolio and 40% of the bad loans outstanding in Chinese system. Most of the bad loans transferred to these companies were of policy-based, as the Government took responsibility for banks' losses related to policy lending prior to 1996.

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