Despite Clean-Up, Asian Banks Lack Robustness, Panel Hears
By Henrike Feig

JEJU, REPUBLIC OF KOREA (17 May 2004) - Asia's crisis-affected economies have made a substantive effort to clean up, recapitalize, and restructure their banking system and adopted diverse approaches, a seminar heard in Jeju yesterday.

But while consolidation and restructuring has occurred, the banking systems are not robust and real nonperforming loans (NPLs) are higher than reported, said Shamshad Akhtar, Director General of ADB's Southeast Asia Department.

She was speaking at a seminar on Banking Sector Reforms in Asia, held alongside ADB's 37th Annual Meeting of the Board of Governors. At the seminar, experts from around the region discussed the state of reform efforts, as well as the future challenges facing Asian banks. Aside from issues of weak credit growth and governance of banks, competitive forces arising from World Trade Organization (WTO) commitments and other global developments require regulators and banks to continue to reposition themselves to deal with emerging developments, Ms. Akhtar pointed out.

While Asian banking has good potential for growth, particularly in consumer finance, sustained economic growth and increases in personal income levels will be a condition for this process. On the panel of experts, Liu Mingkang, head of the China Banking Regulatory Commission, outlined how the People's Republic of China intends to reform its banking system at all levels over the next five years. He pointed out that reform is a process and requires a shared vision, carefully designed sequencing, and effective management. Change of ownership and mindset are going to be critical for successful bank restructuring, and improvements in corporate governance and credit culture.

For the large state commercial banks, diversification of ownership would be achieved through the introduction of private capital and foreign strategic investors. Foreign financial investors would also have a role to play. However, Mr. Liu stated that strategic investors would be considered first, as their skills were crucial to improving the capacity of PRC banks, particularly in retail lending.

Mr. Liu stated that nonperforming assets in the Bank of China and China Construction Bank are to be controlled within a range of 3 to 5%. Recent improvements in NPL ratios were mainly due to new loan growth. In the future, banks need to resolve NPLs through all means including legal recourse, which would be facilitated through further improvements in the legal and institutional environment for NPL disposal.

Shaukat Aziz, Minister of Finance, Pakistan, described the challenges political decision makers face in undertaking reforms in an environment where lending decisions and board appointments were made on the basis of "whom you know rather than what you can contribute." "Reforms will expose vested interests. Reformers require a vision, and need nerves of steel to deal with vested interests," he said.

To effectively carry out banking reforms, problems related to nonbank financial institutions, corporate governance, and accounting and audit practices have to be addressed simultaneously. Also, without a legal environment that enables the enforcement of contracts, "banking sector reforms do not work."

Tarisa Watanagase, deputy governor of the Bank of Thailand, who spoke on Thailand's approach to Banking Sector restructuring, emphasized that transparency and communication were important to turn around market perceptions at the height of a crisis. Reforms are a long-term process. However, the market expected short-term solutions. Therefore clear communication of a convincing long-term restructuring plan was important.

Deborah Schuler, Vice-President of Moody's Financial Institutions and Sovereign Risk Group, said that with the exception of Hong Kong, China and Singapore, and possibly Malaysia, most banking systems remain undercapitalized.

Although asset quality was improving across the region, Moody's estimates actual NPL levels in many countries are higher than officially reported. The share of consumer lending, particularly unsecured credit card business, is rapidly increasing. Although portfolio diversificationis a good development, systems would need to be put into place to control associated risks. She said that many Asian banks are still not earning a risk adjusted return. Future bank profitability remains constrained by excess liquidity and capacity. Moody's expects excess capacity and policymakers' Financial Sector Master Plans to lead to a further consolidation of the banking industry.

Jeunglak Lee, Senior Executive Vice President of Kookmin Bank (KB), pointed out the progress made in improving corporate governance structures in the Republic of Korea, citing the example of KB, which had introduced an independent board of directors, a code of ethics for its employees, and increased transparency and accountability for financial management and accounting.

He said that Korean banking sector reforms have managed to eliminate structural risk factors and improve financial performance. Restructuring efforts in the future would need to address the lack of global competitiveness, nonperforming consumer loans, a weak long-term profit base, and the privatization of government-owned banks.

Dominic Barton, Asia Pacific Chair of McKinsey, said his company expects considerable consolidation of the industry over the next five to seven years, and the emergence of three or four regional champions in Asia.

There is increasing interest from foreign banks in Asia, which represents the single fastest growing retail market in the world. McKinsey expects new growth in revenues from personal financial services in Asia of about US$180 billion by 2010, which is equivalent to the new growth in the US between 1994 and 2001. He pointed out that revenue pools from low-income urban populations could be substantial and Asia's high mobile phone penetration may create a unique opportunity for reaching the "unbanked."

He said major challenges for Asian banks include macroeconomic stability in a number of countries, continued NPL problems, lack of resilience at the bank level, increasing foreign competition, and demographic shifts, which could lead consumers away from traditional deposits.

Read the full text of Shamshad Akhtar's remarks.