Asia's banks hold $1,18 trillion in problem loans: Lehman Brothers

Asia's banks hold $1,18 trillion in problem loans: Lehman Brothers

TOKYO (AFP): Asia's banks are holding US$1,180 billion in problem loans and face a long, slow road to recovery, the U.S. investment bank Lehman Brothers said in a report here Thursday.

It will take some $386 billion to recapitalize the banks, the report said, with Japan, South Korea, Thailand and Indonesia the region's most troubled nations.

"This is no small matter to deal with and the costs will continue to rise until these economies get back on their feet," Robert Zielinski, Lehman's Asian banking analyst, said in the report.

Securing a recovery would take more than just pouring money into the banks and writing off their bad loans, he said.

Banks in Asia, with China and India excluded in the report, hold $13,580 billion in total assets, of which 15 percent are problem loans.

"We think the collapse of the baht in Thailand in July 1997 was as significant to Asia as the fall of the Berlin Wall was to Eastern Europe. It signaled that the old ways of running economies and doing business were over, particularly for lenders and borrowers."

Asian countries controlled their banking industries with regulation, directed lending, permitted oligopolies, limiting the number of banks and outright state ownership.

That spiraled out of control and left the region in its current crisis. On July 2, 1997, when Bangkok effectively devalued the baht in a free float, the depth of the risks became suddenly all too clear.

Japanese banks are now holding problem loans worth $842 billion, Lehmans said, a figure considerably higher than the conservative $650 billion admitted by Tokyo.

Banks' problem loans in South Korea total $122 billion, in Thailand $80 billion and in Indonesia $36 billion.

"A bitter struggle is now underway between the old Asian economic ideology, best exemplified by Japan with its bureaucracy, regulations and lack of transparency and that of the free market.

"The willingness of governments to accept market forces or resist them will determine the timing and extent of recovery."

So far the best progress has been made by Thailand, Indonesia and South Korea, Lehmans said, although across the region "governments have pursued a hit-or-miss approach to rebuilding their banking industries."

In Malaysia however, with Prime Minister Mahathir Mohamad's recently introduced capital controls, the picture is far bleaker.

"Poor policy decisions essentially have cut off foreign investment and created a major problem in the banking system and the economy," the report said.

Instead Asian nations must recognize there is a serious problem and start taking action, by raising interest rates, restricting lending and nationalizing banks, Lehmans said.

Then improved regulations should be set down as a foundation and banks be made to admit the true level of their bad loans and restructure their assets.

Finally once investors can be confident the worst is over, banks should recapitalize, possibly with government guarantees. Then governments should help the industry by cutting interest rates.