Non-performing loans (NPLs) have been a hindrance to economic stability and growth in many parts of the region. A variety of methods are being employed to deal with the problem and - equally important - to prevent the build-up of more NPLs.
One issue that has been occupying the minds of financial authorities in the Asian region is the restructuring of the banking sector. Whether or not the result of financial turmoil in 1997-98, banking systems in a few jurisdictions have been burdened by large amounts of NPLs. There has been significant progress made in the last few years, reflecting much political will in tackling the problem and involving the commitment of substantial financial resources. Indeed, the NPL problem undermines the effectiveness of the banking sector in performing its role as the most important channel of financial intermediation in many jurisdictions in the region and inhibits economic growth and development.
One common feature in the resolution of the NPL problem is the establishment of Asset Management Companies (AMCs) involving, inevitably, the use of public funds to take NPLs off the books of the banks. In Korea, for example, the Korea Asset Management Corporation promptly purchased almost 80 per cent of total NPLs from banks at market value in the aftermath of the financial crisis. In Malaysia, the national AMC, Danaharta, purchased some 40 per cent of total NPLs in the banking system. There are other examples in which bank-specific, rather than national, AMCs are formed. The recovery rate of the NPLs held by the AMCs obviously varies, depending on a host of domestic factors and how the AMCs are structured. The use of public funds in this manner is, of course, regrettable, because it could have been avoidable; but circumstances can be so unpredictable as to be beyond all reasonable risk management parameters inherent in the banking system. The globalisation of financial markets has involved risks of this nature, as we all learned from the Asian financial crisis.
But the story does not end there. Getting the stock of NPLs off the books of the banks of course does not mean that the flow of NPLs will be stemmed. To prevent a build-up of NPLs is a much more difficult task than getting rid of the stock. This is a matter that has also been occupying the minds of financial authorities. In my discussions with other central banks in the region, I sense genuine concerns about this, which has been manifested in NPLs remaining stubbornly high even after biting the bullet with the establishment of AMCs and, in one or two cases, even with very buoyant and thus favourable economic conditions. There is, nevertheless, a high degree of consensus on what is needed to stem the flow of NPLs.
There are three areas, among others, at which specific efforts are being directed. The first is the enhancement of corporate, including bank, governance. This covers a host of issues that are now familiar, and relevant not just to banks and bank customers, but to the financial system as a whole, including accounting practice, disclosure of information, management remuneration arrangements, etc. The second is the enhancement of credit information, including the compilation, organisation and dissemination of credit information, to facilitate better decisions in the allocation of bank credit. In ensuring that credit goes to those who are creditworthy and have the ability to service their debts, and that risks are appropriately priced, the flow of fresh NPLs is minimised. This effort takes various forms, notably the creation of commercial as well as consumer credit bureaux, either publicly run, or privately run but with appropriate supervision from the public sector to ensure data privacy and fairness in the provision of the service. The third is the enhancement of prudential supervision. The bank regulator obviously has an important role to play, not in helping the banks in individual credit decisions, but in ensuring, among other things, that proper systems are in place for taking banking decisions and managing the risks arising therefrom.
These are important areas that require much attention even outside of the context of NPL resolution, as indeed is the case in Hong Kong. Readers are familiar with the continuing emphasis on corporate governance, and the plans for a Commercial Credit Reference Agency and for sharing consumer credit data. They are, I hope, also familiar with the introduction of risk-based supervision and the many prudential guidelines promulgated by the HKMA after consultation with the banking sector. Such efforts help enhance the robustness of the banking sector and help protect the Hong Kong banking sector from being inflicted by the sort of severe NPL problem that is so common in emerging markets. These efforts have meant that, while the Hong Kong banking system's NPLs inevitably increased during the Asian financial crisis, the ratio was one of the lowest in the region. Moreover, the banks have been able to substantially reduce the ratio in recent years to more normal levels, notwithstanding the financial turmoil, the bursting of the property bubble and continuing deflation.
Joseph Yam
21 August 2003
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