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.