Asia's banks fail to tackle bad debt, may hurt growth

Dow Jones, Tokyo

Asia's failure to tackle bad debts has enfeebled its national banking systems and risks depressing growth for years, according to the professional services firm Ernst & Young LLP, the Financial Times reported in its Thursday overseas edition.

Bad loans total US$2.0 trillion across the region and in Indonesia's case are estimated at 60 percent of total bank loans, the firm says in a forthcoming report.

The document says that instead of taking the opportunities to improve their banking systems after the Asian financial crisis, many countries backed away from the painful process of ridding banks of non-performing loans (NPLs), the FT reported.

"Asia faces an even bigger challenge in dealing with its NPL crisis," said Jack Rodman, managing director of Ernst & Young's Asia Pacific Financial Solutions.

"A global economic slowdown, government hesitancy and inconsistency in dealing with the NPL problem, lender intransigence and other issues have caused the region's NPL volume to jump to an estimated $2 trillion."

As well as failing to deal with the problem of bad debts, Asian governments routinely underestimate the volume of NPLs in their banking systems - sometimes by a considerable margin, according to Ernst & Young estimates.

Indonesia's central bank says NPLs in its banking system are 18.5 percent but Ernst & Young estimates the figure to be 60 percent.

China reports NPLs at 28 percent but a more accurate estimate is 40 percent, Ernst & Young says.

Even in Japan, where NPLs are 26 percent of total gross domestic product, bad loans are estimated at 27 percent of total loans against a reported 11.5 percent, the newspaper reported.

The cost of continued failure to deal with the problem will be huge, Rodman said, including, "a much slower rate of GDP growth, or no growth, lower standards of living, less demand for products and services, reduced business investment and less tax revenue for governments."