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.