Asia's banking problems persist

Asia's banking problems persist

By P. Parameswaran

SINGAPORE (AFP): At least 60 Asian banks have wound up and many others are facing a massive overhaul two years after a financial storm ripped through the region, but analysts warn the shakeout is far from over.

Banks, which had grown rapidly from loans fueling Asia's bustling economies, were among the worst hit by the financial crisis triggered by the devaluation of the Thai baht on July 2, 1997.

Loans worth billions of dollars went sour as the crisis slammed the brakes on rapid economic growth, ruined businesses and forced bankruptcies.

"Despite heavy provisioning for non-performing loans (NPLs) to meet strict guidelines, we still have a long way to go (before banks return to a firm footing)," Takahira Ogawa, director of sovereign ratings for Standard and Poor's, told AFP.

Ogawa cited weak foreclosure and loan default procedures as an example. "There must be cooperation among borrowers and lenders, regulatory bodies, accountants, lawyers and courts for a better banking structure.

P. K. Basu, senior economist with Credit Suisse First Boston, said: "While substantial progress has been made across the region, banks are not yet in a position to begin making net new loans even as a large proportion of NPLs have been removed from the books."

Basu said that in an ideal bank workout existing bank shareholders and managements need to bear the brunt of the cost of restructuring to deal with "moral hazard."

"And this is indeed what has happened in most Asian workouts," he said.

In Indonesia, the biggest casualty of the Asian crisis, banks are unlikely to extend new credit before the year-end, said Eko Budianto, head of the Indonesian Bank Restructuring Agency's asset management unit.

The agency says it has Rp230 trillion (US$32.8 billion) of NPLs under its supervision.

Indonesia may need to spend $87 billion to revive the ailing banking sector, according to Standard and Poor's.

In 1997 Indonesia closed down 16 banks, and then in April of 1999 announced the closure of 38 more and the takeover of seven. It allowed nine major private banks to take part in a bank recapitalisation program.

In Thailand NPLs are estimated at more than 45 percent of total loans in the commercial banking system or about two trillion baht ($54 billion).

The central Bank of Thailand nationalized three commercial banks early last year and another six in August. Four nationalized banks have been ordered to merge with state-run institutions, resulting in their effective closure.

But Moody's Investor Service says the Thai banking sector is still in deep crisis with all banks "heavily insolvent in true economic terms."

Bank restructuring in Thailand is slow, with only an estimated 15 percent of total NPLs restructured.

Ogawa of Standard and Poor's said that although Thailand had passed new laws covering bankruptcy and foreclosure, "it will take time for all parties to have a better understanding."

South Korea, which received the biggest International Monetary Fund bailout during the crisis, is also forging ahead with banking reforms but its much-touted sales to foreign buyers of banks nationalized to save them from collapse have been very slow.

Five South Korean banks have been shut down since the crisis erupted and a further five have been merged into larger and stronger institutions. There are now 17 banks compared to 27 just 18 months ago.

NPLs in South Korea as at end-March 1999 stood at 37.6 trillion won ($32 billion).

In Japan, two major banks and three regional lenders have been forcibly nationalized. More closures and mergers will certainly follow.

In a bid to clean up bad bank loans, Japan introduced a 60 trillion yen ($500 billion) bank recapitalisation program in October.

Malaysia's central bank, Bank Negara, has unveiled plans to cut the number of commercial banks from 22 to 16 through mergers, and merchant banks from 12 to nine as the nation recovers from recession.