and their different projects should be offset by different risk premiums charged. this requires the commercial banks to charge interest to offset and cover the risk premiums, which is also for the purpose of absorbing losses from defaults which have low probability of occurring and account for only a small portion of the total loans. the nature of banking business is to take deposits, issue loans and make profits out of interest spreads. not all loans issued can be recovered. there is always a percentage of loans that result in losses and need to be absorbed by higher interest rate income. thus, it is crucial for banks to be able to decide on the prices charged to different clients so that they can prevent large amount of npls from forming or be able to dispose of them. if a one - size - fit - all interest rate is charged to different types of enterprises, the loss of some risky loans would not be covered. if accumulated, even losses on a small scale could evolve into large amount of npls. in sum, the progress of interest rate reform will have a bearing on the source and disposal of npls. market - based interest rate should not only be reflected in pricing of loan products and other assets, but also be extended to pricing of all kinds of services and deposits. in absence of good customers, the commercial banks could adjust their business strategy in two directions : one is to reduce activities on the asset side and expand business on intermediate service, which surely involves pricing of services ; the other is to cut business on both the liability side and the asset side. active management of the liabilities, either expansion or reduction, would surely require commercial banks to exercise discretion in pricing products on the liability side of the balance sheet, including deposits. in this regard, deposit interest rates shall remain flexible too. 3. commercial banks shall be allowed to make full provisioning and write off losses. the related tax polices shall be revised accordingly. bank loans are always subject to a certain degree of economic risks, and at some stage of business operation, the financial risks faced by banks are rather high. the commercial banks have to rely on operational income and profits to offset losses. we can see that in mature economies, banks are required to put aside all kinds of reserves, including risk reserves and others to guard against different types of risks. in the case of china, for a long time, commercial banks were not allowed to make full provisioning. one reason was that the reforms of commercial banks had not been completed. the other

domestic institutional investors have been encouraged to get involved in disposing of npls. with these developments, the npls transfer market is forming and developing. the existence and maturity of such a market is crucial for the banking sector to solve the historical npl problem. 5. measures should be taken to encourage the development of a variety of service intermediaries necessary for the growth of the banking sector. the development of the banking sector requires the support of a variety of highly specialized intermediaries. when banks screening customers, they need accounting firms to audit the financial situation of these customers ; when providing sophisticated financial services, they need law firms to verify and justify the legality of the business of their customers ; when estimating customers ’ assets, they need professional asset quality estimators to determine their value ; when conducting asset management through transactions of financial securities, they need rating agencies to rate the financial products for the purpose of pricing these products. it is common understanding that the growth and development of these specialized intermediaries will contribute to the development of capital market. from the prospective of developing the banking sector, for the commercial banks to improve asset quality and effectively prevent the npls from growing, we must place enough emphasis on the role and development of specialized intermediaries. usually, it takes a long time for the specialized intermediaries to grow and develop and often involves complicated issues. given the time constraint and that i have spoken about this issue on earlier occasions, i will not further explore it. what i would like to emphasize is that we need to adopt a more open attitude toward fostering the development of domestic intermediaries on the one hand, and further opening the service sector and tapping external resources on the other. as a result, there will be more high quality, accountable and specialized service providers in the credit market. 6. consideration shall be given to removing the institutional barriers in the process of improving corporate governance. in the process of commercial bank reforms, many have stressed the importance of corporate governance. it is noteworthy that in addition to the efforts by the commercial banks and their shareholders, we should also consider whether there are some inappropriate policy constraints that relate to our thinking and traditional practice. as have been mentioned by mr. schwab, the concept of corporate governance has evolved into the concept of international corporate governance that originated from a research on the subject by the oecd in the early 1990 ’ s. later the oecd released principles on corporate governance. although the five principles are