Perspective | The Path of Disposing of Non-Performing Assets in Banks: Breaking Through and Moving Forward from a Legal Perspective

In the complex process of disposing of non-performing assets in banks, relevant laws and regulations provide clear norms and guidance for the entire disposal process. During the disposal work, it is necessary to ensure that the process is fair, just, and legal, fully protecting the legitimate rights and interests of all parties.

The most fundamental "Measures for the Extraction and Management of Bad Debt Reserves for Financial Enterprises" is one of the important bases for the disposal of non-performing assets by banks. This measure specifies key contents such as the scope, proportion, and write-off conditions for bad debt reserves. For example, for loans that meet certain conditions, such as when the borrower and guarantor are declared bankrupt, closed, dissolved, and their legal person status is terminated, or have completely ceased operations and have been legally canceled or had their business licenses revoked by the local or higher-level administrative departments for industry and commerce, banks can extract bad debt reserves and write them off according to regulations. The implementation of this measure allows banks to follow established procedures for accounting treatment when facing non-performing assets, timely resolving potential risks, and avoiding excessive impacts on the bank's financial status due to long-term accumulation of non-performing assets.

At the same time, laws and regulations such as the "Civil Code of the People's Republic of China" also play a key role in the disposal of non-performing assets. When banks pursue non-performing loans through litigation and other means, the contract section of the Civil Code provides legal basis regarding the validity of contracts and the identification of creditor-debtor relationships. The provisions of the Civil Code regarding the guarantee system clarify issues such as the form, validity, and responsibilities of guarantors, providing strong protection for banks to realize their claims in the disposal of non-performing assets involving mortgage, pledge, and guarantee measures.

Direct collection, as a traditional "weapon" for banks to dispose of non-performing assets, is widely used in practice. When a loan is overdue, banks usually first adopt direct collection methods, sending collection notices to borrowers to urge them to repay their debts as soon as possible. This process seems simple, but it contains many legal points.
 

First, collection should be conducted within the statute of limitations. According to the provisions of the "Civil Code of the People's Republic of China," the statute of limitations for requesting protection of civil rights from the people's court is three years. If banks fail to assert their rights within the statute of limitations, they may face the risk of losing the right to win the case. For example, in a collection case against a certain enterprise's overdue loan, a bank almost lost the ability to protect its claim through legal means due to neglecting the statute of limitations issue. Later, the bank re-negotiated with the enterprise, reached a new repayment agreement, and successfully maintained its rights by recalculating the statute of limitations.

Second, the choice of collection method is also crucial. Banks can use various methods for collection, such as written letters, text messages, phone calls, and home visits, but regardless of the method used, it should ensure effective delivery to the debtor and retain relevant evidence. For example, a bank sends a collection letter to a debtor via express mail and clearly states on the delivery receipt that the content of the letter is a "collection notice" along with key information such as the debt amount and overdue time, while keeping the delivery receipt as evidence. This way, in subsequent legal proceedings, the bank can effectively prove that it has actively asserted its rights within the statute of limitations, avoiding being passive due to insufficient evidence.

Furthermore, the subject of collection must also be clear. For loans with guarantors, banks should assert rights against both the debtor and the guarantor during collection to ensure that the guarantor's responsibility is not exempted. According to the judicial interpretation and relevant provisions of the Civil Code regarding the guarantee system, in the case of joint liability guarantees, if the bank does not require the guarantor to assume guarantee responsibility during the guarantee period, the guarantor will be exempted from guarantee responsibility. Therefore, in practical operations, banks must strictly follow the procedures and requirements stipulated by law during collection to avoid damage to their claims due to improper operations.

Agreement disposal is a method where banks and debtors or guarantors reach a consensus on the disposal of non-performing assets through negotiation. This method reflects the autonomy of the parties involved and can achieve a balance of interests to a certain extent.
 

According to relevant provisions of the "Civil Code of the People's Republic of China": "If the debtor fails to perform the due debt or occurs in the situation agreed by the parties to realize the mortgage right, the mortgagee can agree with the mortgagor to prioritize compensation with the discounted value of the mortgaged property or the proceeds from the auction or sale of the mortgaged property." For example, in a financial loan contract dispute between a city commercial bank and a chemical enterprise, the enterprise defaulted on the loan due to poor management. After a detailed assessment of the enterprise's asset status, the bank found that one of its properties had certain market value. Therefore, the bank negotiated with the enterprise to use that property to offset part of the debt and redefined the repayment period and method for the remaining debt. Through this agreement disposal method, not only were cumbersome litigation procedures avoided, but the bank was also able to quickly recover part of the funds, while giving the enterprise some breathing space, which is beneficial for its subsequent business development.

However, agreement disposal is not always smooth. In practical operations, there may be issues such as non-cooperation from the debtor or guarantor, and disputes over the valuation of collateral. Therefore, when banks engage in agreement disposal, they should conduct thorough preliminary investigations and communications to ensure the legality, fairness, and enforceability of the agreement. At the same time, for disposal methods such as discounting, auctioning, or selling collateral, operations should strictly follow market fair value to avoid disputes arising from unreasonable pricing.

Borrowing new to repay old is a method that banks adopt under specific circumstances to revitalize non-performing assets, which involves issuing a new loan to repay an old loan, thereby temporarily alleviating the risk of the old loan.
 

For example, a construction enterprise faced difficulties in capital turnover and was unable to repay the bank loan on time. After a comprehensive assessment of the enterprise's operating status, development prospects, and repayment willingness, the bank believed that the enterprise was only temporarily in trouble and had certain repayment capabilities, so it decided to process the borrowing new to repay old business for them. Through this method, the enterprise received new financial support, allowing it to continue its production and operation, while the bank also avoided the immediate exposure of non-performing loans, gaining time for subsequent asset disposal.

However, there are certain legal risks associated with borrowing new loans to repay old ones. According to the relevant provisions of the Civil Code regarding the guarantee system, if the parties to the main contract agree to use a new loan to repay an old loan, the guarantor shall not bear civil liability unless the guarantor knows or should know otherwise. If the new loan and the old loan are guaranteed by the same guarantor, the previous provisions do not apply. Therefore, when banks handle the business of borrowing new loans to repay old ones, they should obtain the written consent of the guarantor to ensure the continuation of the guarantor's liability. At the same time, for the collateral, since the contract for borrowing new loans to repay old ones is a new contract, the original collateral for the main contract must re-sign the mortgage (pledge) contract and re-register the mortgage (pledge) to ensure the effectiveness.Debt GuaranteeValidity.

When the debtor fails to perform the due debt, the bank has the right to realize the security rights based on the relevant provisions of the "Civil Code of the People's Republic of China" to ensure that its claims are realized.
 

According to the relevant provisions of the "Civil Code of the People's Republic of China": "If the mortgagee and the mortgagor have not reached an agreement on the realization of the mortgage rights, the mortgagee may request the people's court to auction or sell the mortgaged property." For example, if a borrower uses a property under their name as collateral to obtain a loan from the bank but fails to repay on time, after multiple unsuccessful negotiations with the mortgagor, the bank can apply to the court to realize the security rights. If the court, after review, lawfully decides to auction the mortgaged property, the bank will be prioritized in receiving compensation from the auction proceeds, allowing it to recover most of the loan principal and interest, effectively reducing the loss of non-performing assets.

In the process of realizing security rights, banks need to pay attention to the legality of the procedures and the sufficiency of evidence. First, they should ensure that the establishment of security rights is legal and valid, including the signing of the mortgage contract, registration of the mortgaged property, and other complete procedures. Second, when applying to the court to realize security rights, they should provide detailed evidence of the creditor-debtor relationship, proof of security rights, and relevant evidence of negotiations with the mortgagor to improve the success rate of the application.

Court litigation is one of the important means for banks to dispose of non-performing assets. When other disposal methods cannot effectively realize claims, banks often choose to maintain their rights through litigation.
 

The process of litigation recovery is relatively complex. First, banks need to prepare sufficient evidence materials, including loan contracts, guarantee contracts, collection records, transfer vouchers, etc., to prove the existence of the creditor-debtor relationship and the debtor's breach of contract. At the same time, banks should pay attention to the statute of limitations for litigation to avoid losing the right to win due to exceeding the statute of limitations. For example, when a certain bank pursued litigation for a overdue loan, due to the complete preservation of previous collection records and timely filing of the lawsuit within the statute of limitations, it ultimately successfully obtained the court's support, ruling that the debtor repay the loan principal, interest, and related fees.

During the litigation process, banks can also apply for property preservation measures, such as sealing, seizing, or freezing the debtor's property, to prevent the debtor from transferring assets and ensure that there are sufficient assets available for execution in the subsequent execution phase. According to the "Regulations on Several Issues Concerning the Execution Work of People's Courts", the specific distribution of the property of the executed person should be presided over by the court that first sealed, seized, or froze the property. Therefore, it is of great significance for banks to timely apply for the sealing of mortgaged property and other assets to protect their rights.

In addition, the security rights holder can also apply to directly participate in the distribution of execution. According to the relevant provisions of the "Interpretation of the Civil Procedure Law", creditors with security rights on the property sealed, seized, or frozen by the people's court have priority and can directly apply to participate in the distribution, claiming priority compensation rights. This provision saves time and money for banks in disposing of collateral and improves the efficiency of handling non-performing assets.

In the battlefield of bank non-performing asset disposal, practical cases serve as a mirror, clearly reflecting the paths to success and the traps of failure, providing valuable experience and profound insights for future practitioners.

A certain rural commercial bank, when faced with a large amount of non-performing loans due to poor business operations of an enterprise, actively explored innovative disposal methods and ultimately successfully resolved the risk, achieving asset recovery and revitalization. The enterprise faced intensified market competition, unsold products, and a broken capital chain, making it unable to repay the bank loan principal and interest on time, with non-performing loan balances reaching tens of millions, severely affecting the bank's asset quality and operational efficiency.
 

After in-depth analysis of the enterprise's asset status, operational prospects, and market environment, the bank decisively adopted a combination strategy of "debt restructuring + introducing strategic investors". First, the bank engaged in open communication and negotiation with the enterprise, reaching a debt restructuring agreement. According to the agreement, the bank appropriately extended the loan term, reasonably lowered the interest rate, and converted part of the debt into equity of the enterprise, thereby reducing the enterprise's short-term debt repayment pressure and enhancing its financial sustainability. At the same time, leveraging its resource advantages and industry influence, the bank actively introduced a strong strategic investor to the enterprise. The strategic investor not only injected urgently needed funds into the enterprise but also brought advanced technology, management experience, and market channels, helping the enterprise optimize its product structure, expand its sales market, and gradually restore profitability.

From this successful disposal case, we can summarize the following key experiences: First, in-depth due diligence and accurate risk assessment are fundamental. Before disposing of non-performing assets, banks should conduct comprehensive and detailed investigations and analyses of the debtor's asset-liability status, operational conditions, and market prospects to accurately assess their risk status and potential value, providing a basis for formulating a scientific and reasonable disposal plan. Second, innovative and flexible disposal methods are key. When traditional disposal methods are ineffective, banks should dare to break conventions, combine actual situations, and comprehensively use various innovative methods such as debt restructuring, asset securitization, and introducing strategic investors to maximize the value of non-performing assets. Third, proactive communication, coordination, and win-win cooperation are guarantees. In the process of disposing of non-performing assets, banks should maintain close communication and coordination with debtors, guarantors, government departments, strategic investors, and other parties to form a joint force, jointly promote problem-solving, and achieve a balance of interests and win-win outcomes.

However, not all non-performing asset disposal cases can achieve satisfactory success. In some cases, due to various reasons, the bank's disposal actions may encounter setbacks, even leading to further losses.
 

For example, a certain village bank, when disposing of a non-performing loan, relied too much on the realization of the collateral and neglected to explore and integrate other potential repayment sources of the debtor. The collateral for this non-performing loan was a commercial property, but due to the economic downturn, the local real estate market was sluggish, and the market value of the commercial property significantly shrank, making realization extremely difficult. After multiple unsuccessful attempts to auction the collateral, the bank fell into a passive situation, unable to recover the loan principal and interest in time, and further increased losses due to maintenance and management costs of the collateral.

From this failed case, we can draw the following lessons: First, we should not rely too heavily on a single disposal method. When banks formulate plans for dealing with non-performing assets, they should fully consider various possible situations, develop multiple alternative plans, and flexibly adjust according to actual circumstances to avoid falling into difficulties due to over-reliance on a single method. Second, it is important to focus on a comprehensive assessment of the debtor's overall repayment ability. In addition to collateral and other guarantees, banks should also pay attention to the debtor's operating conditions, cash flow situation, other asset-liability situations, and potential repayment sources, comprehensively assessing their repayment ability and formulating more comprehensive and effective disposal strategies. Third, it is necessary to keep up with market changes and flexibly adjust disposal strategies. During the process of dealing with non-performing assets, the market environment may change, and banks should closely monitor market dynamics and timely adjust disposal plans to adapt to new situations and reduce disposal risks.

In the process of dealing with non-performing assets, risk prevention is always a crucial aspect. Compliance disposal is the lifeline of banks' non-performing asset disposal. Once laws and regulations are violated, banks may face legal lawsuits, administrative penalties, and other risks, which can lead to economic losses and damage the bank's reputation and image. For example, in a case of non-performing asset disposal at a certain bank, due to failure to disclose information and conduct public bidding according to relevant regulations during the debt transfer process, it was deemed a violation by the regulatory authorities, resulting in severe administrative penalties and attracting public attention, negatively impacting the bank's reputation.

To effectively prevent risks, banks should establish and improve risk management systems, strengthen internal management, and cooperate with external supervision. In terms of internal management, banks should improve internal control systems, clarify the responsibilities and authorities of each department and position, and strengthen the supervision and review of the non-performing asset disposal process to ensure that every link complies with legal regulations and internal system requirements. At the same time, it is important to enhance employee training and education, increase employees' legal awareness and risk prevention awareness, ensuring they strictly adhere to relevant regulations during the non-performing asset disposal process to avoid risks caused by improper operations.

In terms of external supervision, banks should actively cooperate with regulatory authorities, timely and accurately report relevant information on non-performing asset disposal, and accept supervision and inspection from regulatory authorities. Regulatory authorities should strengthen the supervision of banks' non-performing asset disposal, improve regulatory systems and standards, increase penalties for violations, and create effective regulatory deterrence to promote banks to standardize non-performing asset disposal behaviors and prevent various risks.

Only by integrating compliance concepts throughout the entire process of non-performing asset disposal, strengthening the collaborative cooperation between internal management and external supervision, can banks effectively prevent risks in a complex and changing market environment, achieve sustainable development in non-performing asset disposal, and provide strong support for the stability of the financial system and the healthy development of the real economy.