Academic journal article International Journal of Business

Non-Performing Loan Resolutions in China and Taiwan: A Policy Evaluation

Academic journal article International Journal of Business

Non-Performing Loan Resolutions in China and Taiwan: A Policy Evaluation

Article excerpt

ABSTRACT

The soaring non-performing loans have been hampering the recovery of Asian countries from the 1997 crisis. Even after taking drastic policy actions in reducing bad debts, countries in Asia still find it difficult to resolve the problems and restore the safety and soundness to the banking systems. This essay looks into the severity of the non-performing loan problems in China and Taiwan and comments on the policy resolutions that have been undertaken. The essay singles out the nationalization of bad debt as the common cause that led to the bad-debt problems in these two economic markets and comments on why the establishment of asset management companies would not be able to resolve the problems.

JEL: G28

Keywords: Non performing loans resolutions; Nationalization of bad debts; Asset management companies; Financial reforms

I. INTRODUCTION

The soaring non-performing loans have been hampering the recovery of Asian countries from the 1997 crisis. Even after taking drastic policy actions, countries in Asia still find it difficult to resolve the non-performing loan problems and restore safety and soundness back to the banking systems. This short essay looks into the severity of the non-performing loan problem in China and Taiwan and comments on policy resolutions that have been undertaken in resolving the problem.

II. BANKS' BAD DEBT PROBLEMS

A. The Chinese Banking Industry

The official estimate by the People's Bank of China has shown that about a quarter (25%) of total bank loans were not performing by the end of 1997 for the four largest state-owned commercial banks. For other specialized banks and local cooperatives, the non-performing loans (NPLs) could be much worse. The percentage of NPLs could be understated, because Chinese banks only record the portion of the loans that is overdue. If the total amount of loans is included, the percentage of NPL could be as high as 60 percent of total loans in China. Even with the official data, the percentage of NPLs had been steadily rising over the last few years, increasing from 20 percent in 1994, to 22 percent in 1995, and to 25 percent in 1997. Table 1 shows the NPLs for those joint-equity banks, which had better NPL records than the overall depository financial institutions. Even for these banks, the average NPLs ratio increased from 11.8 to 17.3 percent between 1997 and 1999.

The NPL problems had impacted commercial banks. Profitability had been dropping significantly, from 13.7% in 1993 to 0.2 percent in 1997. Table 2 provides more details about the profitability for specialized banks over the years and for individual specialized banks in 1999 and 2000. If the practice of recording interest income on NPLs as income during the year is disallowed, the whole banking industry's returns might have been negative. For city and rural cooperatives, the profitability is even worse.

The NPL loans had also caused the deterioration of bank capital. On the one hand, the loan loss reserve ratio was dragged down to a very low percentage, less than 10% of the total NPLs in 1999. Even for the healthier 10 shareholding banks, the loan loss reserves/NPL ratios in 1999 for Bank of Communications was 9.0%, 6.5% for Everbright, 6.8% for Shenzhen Development Bank, 2.1% for Merchants Bank, and 1.0% for Fujing Industrial Bank. Only Minshen Bank and Shanghai Pudong Development Bank had a ratio greater than 10% (15.3% and 20.6%, respectively).

On the other hand, the capital to total assets ratio of Chinese banks has been decreasing, from 12.1% in 1988 to 2.4% in 1998. As shown in Table 3, even for the stronger specialized banks, none of them had a Tier I capital adequacy ratio above the 8% international standard. Many banks technically were bankrupted.

B. The Taiwanese Banking Industry

In terms of absolute percentage of NPLs, Taiwanese banks fare a little better, with 6. …

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