Asian NPLs up 33% to $2t: E&Y

Asian NPLs up 33% to $2t: E&Y

Dow Jones, Singapore

Nonperforming loans in Asia have risen 33 percent to US$2
trillion over the past two years, despite a concerted effort by
officials to bring the nagging problem under control, according
to a report issued Wednesday by Ernst & Young.

The global economic slowdown, inconsistency in dealing with
the problem and lender complacency are among the factors fueling
the increase, the report said.

"Our final estimates are roughly double the official NPL
number given by the region's central banks and are certain to be
controversial," said Jack Rodman, managing director of Ernst &
Young Asia Pacific Financial Solutions.

One of the major reason's for the discrepancy between the
estimates is that Ernst & Young included NPLs that had been moved
off a bank's balance sheet to an asset management corporation.
Official government estimates of NPLs often exclude those loans.

"Merely moving NPLs from the balance sheet to an AMC doesn't
get rid of the problem," Rodman said. "Selling or resolving the
loan and returning the assets to the private sector is the only
solution."

Ernst & Young also applied strict criteria in determining what
constitutes an NPL, including a category called "impaired loans."
Classifying a loan as impaired is a somewhat subjective exercise,
and many banking regulators in Asia lack the expertise to make
such a judgment, according to the report.

The NPL problem is one of the few remaining vestiges of the
1997-98 Asian financial crisis, which crippled banking systems in
the region.

In many markets the pace of disposition of problem loans has
been painstakingly slow, with some governments struggling just to
keep pace, Rodman said.

Although Japanese banks have disposed of $300 billion in NPLs
since 1997, new NPLs coming on the books have kept the overall
level steady at about $1.2 trillion.

Japan by far is the largest holder of NPLs in the region,
accounting for about 60 percent of the nine countries covered in
the Ernst & Young report.

China was a distant second with $480 billion, and South Korea
was third with $100 billion. Other countries with less than $100
billion in NPLs (in descending order) were: Taiwan, India,
Thailand, Indonesia, Malaysia, and the Philippines.

Based on its estimates, Ernst & Young puts the total level of
NPLs at 29 percent of the region's gross domestic product.

A report issued by an Asian Development Bank think tank
earlier this week also expressed a note of caution regarding the
region's NPL problem.

The report said that with the exception of the Philippines,
much of the reported progress on the NPL front has been the
result of the transfer of bad loans to AMCs.

"While this has enabled banks to resume lending and support
recovery, the real test of restructuring also hinges on the
progress in asset disposal by the AMCs," according to the report.

AMCs set up in Malaysia and South Korea have made the most
progress in that regard, the report said.

One promising sign for the country's having difficulty
disposing of NPLs is the fact that there is a growing number of
foreign investors "ready, willing and able to step up and invest
in Asia," according to the Ernst & Young report.

Many of these sources of foreign capital, notably U.S.
"opportunity funds," have either formed alliances with local
investors or have established their own operations using Asian
nationals to service the NPLs, the report said.