Taiwan's bank timebomb - debt crisis - Brief Article

Business Asia, Oct, 2000 by Alan Wheatley

Taiwan has won praise for weathering Asia's storm, but ALAN WHEATLEY reports on growing fears of a banking crisis facing the Chen Government

ABAD-LOAN timebomb is primed to explode in Taiwan -- and the ticking is getting louder. When the bomb does go off, it will not pack the same charge that wreaked havoc on other economies since Asia's 1997-98 financial crisis.

However, Taiwan's bad debt problem has been allowed to fester for several years. Policy-makers and analysts say it need not cause major economic damage provided it is defused properly.

"Some private banks and some local financial institutions are in quite bad shape, but the publicly owned banks are safe," says Po-Chih Chen, chairman of the Council for Economic Planning and Development. "The situation is not that terrible."

John Caparusso, of Salomon Smith Barney, broadly agrees, describing the banking system as fundamentally solvent and stable.

"The banks aren't under enormous pressure," he says.

And that, Caparusso argues, is precisely the problem.

He estimates non-performing loans in the banking system at about 10 per cent of national income -- about twice the officially reported level, but only a quarter of Thailand's NPLs at their peak.

"In some ways, we haven't had a deep enough crisis in this country, so there hasn't been a catalyst for meaningful reform," Caparusso says.

Things now though are changing. A spreading credit crunch, growing fears of financial distress among heavily indebted business groups and an enduring real-estate slump are among the factors belatedly prodding the authorities into action.

"Salvageable banks must be rescued to prevent a banking crisis," Central Bank Governor Perng Fai-nan says.

Vice-Premier Lai In-jaw announced recently that the young government of President Chen Shui Bian is planning measures to spur competition and consolidation in an industry that analysts say is grossly overbanked and

inefficient.

Return on equity (ROE) regularly exceeded 20 per cent until 16 new banks were allowed to enter the market in 1993.

With too many banks pursuing the same business, margins were squeezed and ROE slumped to 8 per cent last year, according to Norman Yin, a professor of banking at National China University.

The government recognises the need to boost the efficiency of its financial services industry, which will face much stiffer competition once Taiwan joins the World Trade Organisation, probably next year. As in most Asian countries, many loans have been extended largely on the strength of personal and political connections and not commercial considerations.

Moreover, the credit culture is weak. Yin says only two banks use the "value at risk" model commonly used by US and European banks to control their exposure.

The new government has staged a partial crackdown on irregular lending since it came to power in May, ending 55 years of National Party (KMT) rule. But Yin says little of substance has changed, with the government regularly leaning on banks to roll over questionable loans.

"The new government is using the same tricks as the KMT," he says.

If the government does grasp the nettle of reform, Yin says it will be because swooning property and equity prices heighten the financial woes of real-estate conglomerates and firms that have borrowed heavily using shares as collateral.

"We estimate that probably sometime in the first quarter financial problems might break out. The steam in the pressure cooker is building up," Yin says.

As elsewhere in Asia, Taiwan is planning to set up asset-management companies, using public and private money, to take off banks' books the sour loans that are hobbling the extension of fresh credit, especially to lower-quality borrowers.

"It's at the point where the daily operations of many companies are threatened," says Yenpao Chen, director of economic forecasting at the Chung-hua Institution for Economic Research think-tank, who estimates it will take banks three to four years to unload their bad loans.

Caparusso says one problem, encountered across Asia, will be to persuade banks to unload assets at a discount, especially when, as is the case of Taiwanese banks, they are not flat broke.

"How do you find willing sellers when there aren't enough strains in the system?" he asks.

The government, hoping that fresh blood will energise the sector, intends to make it easier for foreign banks to enter the market by relaxing the curb that limits stakes to 15 per cent.

But Yin, the banking professor, says the very high T$10 billion (US$320 million) capital requirement on banks would be a deterrent. "I don't think any foreign banks would be willing to put in that kind of money to buy a bad bank in Taiwan," he says.

More generally, the government, which is in a minority in parliament, will have to muster the sustained political will to take on vested interests and push through change.

Caparusso says Taiwan could probably choose to take the path of least resistance and limp along, as Japan did for years, without root-and-branch banking reform or an overhaul of its corporate governance.