ADB warns of possible new Asian banking crisis
ADB warns of possible new Asian banking crisis
Agence France-Presse, Manila
India, Pakistan and Taiwan are at risk of a banking sector crisis unless the authorities push through reforms of the industry, the Asian Development Bank (ADB) warned Wednesday.
Lax regulations on provisioning, accounting and loan classification led to the 1997-1998 Asian financial crisis that ravaged the economies of Indonesia, South Korea, Malaysia, the Philippines and Thailand and created shock waves felt across the globe.
Seven years on, India, Pakistan, and Taiwan "may face one if the authorities are unable to forestall a crisis using preemptive financial reforms," the ADB said in its annual economic outlook report.
The pressure of globalization and ensuing liberalization has exposed the shortcomings of the financial sectors of these countries including "low capitalization ratios, limited expertise in risk management," rising bad loans and inadequate banking supervision and regulation.
"NPL (non-performing loan) ratios are reaching all-time highs in these three economies, even as the reported figures are still thought to underestimate the actual levels," it added.
"The role that globalization has played in exposing financial sector weaknesses suggests that financial sector problems could become more acute over the coming decade -- unless, critically, governments take advantage of the current macroeconomic buoyancy to address them."
Asian governments must develop capital markets to serve as alternative financing sources, improve corporate governance of banks and revamp insolvency laws, the report said.
For Asia as a whole, the NPL levels among 19 developing member economies where data is available has fallen to about 17 percent as of end-2002 but this is still more than double those of Latin America and Eastern Europe.
The health of the banking sectors of the five previous crisis countries remains "fragile" while in some others, "reform efforts have been more limited and problems may be looming," the ADB said.
"This situation reflects cases where resolution schemes and banking supervision may not be working properly," or more importantly, "that banking sector reform has been limited and banks are creating more NPLs while disposing of the old ones."
It cited problems in China, Bangladesh, Pakistan, the Philippines, and some central Asian republics.
China's problems have been mainly due to "substantial loans provided on other than commercial considerations".
In the Philippines, which only passed an asset management company (AMC) law last year, the NPL ratio has been trending upward.
"No transactions have yet taken place under the law" due to the high cost of setting up such vehicles and the limited investor base.
The ADB said creating AMCs has become the central revival strategy for the crisis economies, where governments spent billions of dollars in liquidity support to distressed lenders or in buying NPLs.
"Further combined costs of cleaning up AMCs can still range from four percent of GDP (gross domestic product) in the Philippines to 13 percent (for Thailand) despite the fiscal costs already incurred," which are equivalent to between 16 percent of GDP for Malaysia to 55 percent of GDP for Indonesia.
"Deficiencies in national legal and judicial frameworks, particularly inadequacies in foreclosure and bankruptcy procedures and inexperienced judges have been major obstacles in the bank restructuring process," with creditor rights not in accord with international best practices.
The ADB also warned that the practice by banks or AMCs of using debt-equity swaps to dispose of NPLs may come back to haunt them as such a practice may not improve banking operations, raising the possibility of more NPLs in the future.