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	Table of Contents
p. 11 of 69 BACK | NEXT Foreword, Acknowledgments, Acronyms and Abbreviations, Definitions I. Developing Asia and the World Economic Highlights in 2003 and Prospects for Developing Asia and the Pacific in 2004-2005 Prospects for the World Economy in 2004-2005 Developing Asia: Subregional Trends and Prospects Risks to the Outlook for Developing Asia Resolving Developing Asia's Nonperforming Loans Recent Trends Nonperforming Loan Resolution in the Crisis-Affected Countries Nonperforming Loan Resolution in India; Pakistan; and Taipei,China Nonperforming Loans in Some Asian Transition Economies Future Problems: Reentry and New Nonperforming Loans Endnotes II. Economic Trends and Prospects in Developing Asia III. Foreign Direct Investments in Developing Asia

Asian Development Outlook 2004 : I. Developing Asia and the World

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Nonperforming Loans in Some Asian Transition Economies

Since embarking on creating a market economy, PRC, Kazakhstan, Kyrgyz Republic, Mongolia, and Tajikistan have had various banking crises, ranging from the less serious, e.g., banking stress involving a large share of NPLs, to dangerously grave, e.g., bank runs and systemic loss of confidence in the banking sector. Studies of banking crises in transition economies have focused on crisis resolution strategies, such as deposit guarantees, recapitalization, mergers and liquidation, as well as the heavy costs of bank restructuring (e.g., Enoch et al. 2002). These studies find that hyperinflation in the wake of transition in some countries actually reduced the real burden of the inherited debt. Consequently, governments were better able to distribute the burden of repayment among shareholders, depositors, and themselves. Moreover, the choice of resolution strategy depended not only on prevailing macroeconomic conditions but also on the structure of the banking system. In particular, in countries where small banks proliferated as a market economy took hold, liquidation imposed relatively little cost on the broader economy.

The experience of these transition countries suggests that one key issue is the incentive structure for the rehabilitation agency to take over the bad loans. Another important factor is the quality of institutions-particularly the legal framework that governs property rights and commercial transactions between creditors and debtors and that relates to bankruptcy procedures, as well as the knowledge and expertise present in the country’s court system.

These five transition economies have had broadly similar experiences in NPL disposal. In the first place, all of them made use of centralized agencies to take over bad loans and carry out their disposal. Likewise, they did not take over all bad loans but left some of them with banks. There are at least two advantages to this: one is to prevent moral hazard (creating a bailout expectation among banks); another is for the banks to develop in-house expertise in carrying out collection methods and individual loan workouts.

The success rates in the different countries are broadly similar. After around 3 years of operation, the PRC’s AMCs had a cash-recovery rate equal to 21% of transferred value, Mongolia 17%, and the Kyrgyz Republic 12%. The share of AMC-recovered assets is larger in the PRC, at more than 50%, because of SOE restructuring via debt-equity swaps, which alone amounted to close to 29% of transferred loans. If these are taken out of the equation, the PRC’s AMC disposal rate is around 25%, close to the Kyrgyz Republic’s 26%. If measured in terms of enterprises that were restructured or sold, at least one of Kazakhstan’s AMCs has had a 50% disposal rate.

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