Asia makes headway in banking revamp

Asia makes headway in banking revamp

By P. Parameswaran

SINGAPORE (AFP): Crisis-hit Asian economies embracing reforms to their battered financial sectors have made much headway in restructuring banks but are lagging in the key area of corporate governance, experts say.

Citing the current Bank Bali scandal in Indonesia, experts from the influential Pacific Economic Cooperation Council (PECC) cautioned governments that half-hearted bank restructuring would create even bigger problems.

The financial sector was the worst hit in the Asian financial crisis which erupted in mid-1997 and plunged much of the region into a recession.

Most of the affected economies are now feverishly phasing in reforms and attempting to rehabilitate the financial sector by cleaning up banks' balance sheets, closing down unviable institutions and strengthening regulatory supervision.

"There has been good progress on financial restructuring and the next priority should be corporate sector regulation and development of management systems for the corporate sector," said Christopher Findlay, chairman of PECC's Coordinating Group.

He was among the experts who attended a closed-door technical workshop here this week on financial sector reforms and the restructuring of bank and non-bank corporations.

The meeting was organized by PECC, a unique partnership of business leaders, researchers and officials from 23 Asia-Pacific economies, as well as the World Economic Forum and the Institute of Southeast Asian Studies.

Findlay said that corporate governance principles to be adopted should be "credible and compelling to the market place."

"I think the market is not sufficiently impressed by the extent of restructuring in the corporate management side," he told AFP.

Jesus Estanislao, chairman of PECC's financial markets development group, said a specific example of slow progress in corporate governance in crisis-hit nations was in the area of valuation of assets in line with market procedures.

"It is a difficult process in different economies. For example, even if you set up institutions to handle asset disposal, that does not necessarily mean that asset disposal is going to be done in a very nice, smooth way.

"There are still institutional, cultural, confidence problems that come up," said Estanislao, a former Philippine finance secretary.

He said that based on market feedback, the "most significant progress" in financial reforms in Asia was in bank restructuring "with still work to be done in corporate governance."

"It's very easy for governments to come and say they want to bail out banks and convert debt into equity but the moment you go into the enterprise level, the corporate level, that is not so easy," Estanislao said.

Marie Pangestu, PECC's trade policy forum program coordinator, said the issue of who banks lent money to was vital because "you can rehabilitate banks but if the non-performing loans are bad, then a restructured bank may be an insolvent bank again."

Citing the Bank Bali scandal, she said: "It is a major setback to financial sector reforms because it brings to the forefront the issue of rule of law and whether some people can be above the law."

Bank Bali paid US$80 million in commission to a private company owned by an executive of Indonesia's ruling Golkar party for the recovery of its loans to three banks closed by the government.

The Bank Bali scandal threatens a costly bank restructuring and recapitalisation drive and has weakened foreign and domestic confidence in Indonesia's banking sector and the government, economists say.

"The job of supervising the banks that have been restructured is very important because if you don't do it properly obviously you may have to either close more banks down or have another round of recapitalisation," Pangestu said.