From Far Eastern Economic Review, cover dated 20 May 2004. Taken from this page.

BANKING IN ASIA: DEBT RESTRUCTURING
Lessons From The Fall

As they near the end of their banking sector clean-up, Southeast Asian countries have some valuable lessons to teach the rest of the region, the most important being the need for speed when dealing with bad loans
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By Tom Holland/HONG KONG
Issue cover-dated May 20, 2004
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AT THE END OF APRIL, with little fanfare and no fireworks, the Indonesian Bank Restructuring Agency, or Ibra, pulled down its shutters and closed shop. What little attention was paid to the closure was mostly critical, focusing on what Ibra had tried to do and failed, or on what it had not even attempted. Almost nothing was said about just how much the agency had achieved in its brief life.

Established in the depths of the Asian Crisis in 1998 to salvage what it could from the carnage in the Indonesian banking system, Ibra was saddled with some 373,000 nonperforming loans with a face value of 341 trillion rupiah ($39 billion at today’s exchange rate). Today, six years later, Syafruddin Temenggeng, Ibra’s last chairman, is able to claim that at closure, 95% of those bad debts had been successfully resolved.

Viewed like that, Indonesia’s progress is impressive; but it is not unique. Among the other countries affected by the 1997-98 crisis, Thailand, Malaysia and South Korea all established agencies to resolve their own bad-debt problems. Each country now hopes the disposal process is finally approaching its end.

In Malaysia, Zukri Samat, managing director of Danaharta, the national asset-management company, or AMC, expects his agency will be wound up for good next year. The Bank of Thailand is also planning to shut down its Corporate Debt-Restructuring Group in 2005, while in Korea, Kamco, the Korea Asset-Management Company, is winding down its operations.

Sadly, these closures will not mark the end of Asia’s bad-debt problem. Although the crisis countries of 1997 have now largely resolved the nonperforming debts that plagued their banking sectors, problems elsewhere remain untackled.

“There has been a clean-up, but not as much as the market would like,” says Kevin Colglazier, head of global fixed interest at First State Investments in London. “The good work done in places like Southeast Asia is mitigated by the unresolved problems in China and other places.”

In India, legislation has only recently been put in place to address the legacy of bad debts bequeathed by the “socialist” economy of the country’s past. In Japan, bank restructuring proceeds at a glacial pace. And in China, observers fear a whole new generation of bad debts will be created by last year’s ballooning credit growth. If these landmines are to be defused safely, argue Syafruddin, Zukri and others, it is essential that the lessons of bank restructuring from the crisis countries are closely studied across the region.

Ask almost any of the officials or bankers who have been involved in restructuring or disposing of nonperforming loans in Asia over the past few years what they have learned from the experience, and they will answer that speed is all important.

“The longer restructuring takes, the worse it gets,” says Syafruddin. It is a lesson that Indonesia learned the hard way. When Syafruddin took over Ibra in April 2002, the agency had disposed of only a fifth of the debt on its books in three-and-a-half years. Biting the bullet, Syafruddin introduced a crash programme to resolve the remaining bad debts. In the end Ibra recovered around 28% of the face value of the assets it held; low, perhaps, but the same as the rate achieved by Kamco in Korea.

The sooner nonperforming loans can be disposed of, agree officials and private sector financiers, the better for Asia’s banking systems and its economies at large. Until banks are relieved of their nonperforming-loan burdens, they will not resume productive lending, explains Harjit Bhatia, Asia-Pacific president of GE’s Global Financial Restructuring unit. “We need to move much faster in Asia to bring back growth,” says Bhatia. “We need to clean up our act so banks can get back to their basic business of lending.”

Although a rapid resolution of bad-debt problems is vital, it is impossible without solid political backing. “Success depends on political and regulatory leadership,” says Bhatia, who controls some $2 billion worth of bad debt in 40 portfolios across Asia. “Governments have to acknowledge the problem exists.”

In 1997 and 1998, the solution favoured by Asian governments was to establish monolithic official agencies to manage the process. In retrospect, admits Syafruddin, that may not have been the best approach. Government-run agencies, he says, are too susceptible to political manipulation. Syafruddin himself was Ibra’s seventh chairman in less than four years. During that period, the agency was plagued by political interference. As a result, its recovery rate on some portfolios of bad debt was as low as 6%, he says.

In the future, countries dealing with nonperforming-loan problems should push their banks to dispose of bad assets through the private sector. “Make the market work,” he says. “Never set up big institutions like Ibra.” But before private investors risk their own capital, they require a transparent and efficient legal framework to ensure their commercial rights are respected and that the processes followed are predictable.

Nowhere is this more important than in China, where analysts have estimated that as many as 45% of all bank loans may be nonperforming. “Given the magnitude of the problem the Chinese banking system faces, it is imperative that clear rules are put into place,” says Bhatia from GE.

Finally, governments must ensure that similar explosions of bad debt do not recur. That can only be done by ensuring sound macroeconomic management and by rigorously promoting the best standards of corporate governance, says Tumnong Dasri, head of the corporate restructuring unit of the Bank of Thailand. “During the crisis, too many companies got into property development,” he laments. Today, the bank of Thailand is stepping up its monitoring of commercial bank lending, says Dasri, to ensure that a nascent property boom in Thailand does not lead to a similar situation.

It’s a point that resonates with Syafruddin. One of Ibra’s main problems, he says, was the woeful quality of the assets it held. Inspecting properties advanced as collateral on bank loans, Syafruddin recalls finding that one turned out to lie below the high water mark. “You could see it at low tide,” he recalls; another turned out to be a Jakarta cemetery. Only with better corporate governance can similar abuses of Asia’s banking systems be avoided in future.

  

Posted on May 14th, 2004 by jl
Filed under: Regional Financial Concerns: Asia