How Asia's Banks are Changing
Cleaning up bad debt, tightening credit controls
and learning to cater to consumers.
In this article
A FUTURISTIC corridor leading to
Singapore’s financial district
Economic growth requires economic flexibility, which in turn requires flexibility in the banking system. A combination of market forces and regulatory reform is laying the foundation for more agile systems throughout Asia—an essential framework as Asia’s banks try to adapt quickly to the global marketplace of the 21st century.
REFORMS BRING GREATER STABILITY
Between 1970 and the early 1990’s, Asia enjoyed a period of growth that many referred to as the “economic miracle,” fueled largely by foreign investment. Some of its foundations were precarious, however. Banks were channeling short-term money from overseas into long-term loans to questionable, government-favored enterprises. The bubble burst in 1997, when the rapid withdrawal of foreign investors sent asset prices spiraling downward and left the overextended banks poised on the brink of collapse.
The crisis paved the way for badly needed reform in Asian banking systems. Governments have stepped in and helped banks clean up their balance sheets. China was able to use its foreign exchange reserves to eliminate bad loans worth a reported 17% of GDP in 1999, then later recapitalize two of its largest banks to the tune of $45 billion. Japan injected around $510 billion to bail out banks between 1998 and ’99, but it was several years before structural reforms took hold, and the system has only recently begun showing signs of health. Bank reform has been most effective in South Korea, as evidenced by a drop in non-performing loans to $11.9 billion and a historic low of under 2% of all outstanding assets by 2005.
Most critical to Asia’s banking reforms has been establishing prudential norms to make loans to profitable businesses capable of paying them back. Asia’s banks have improved their credit assessment standards and audit controls. Financial transparency and disclosure have also vastly improved, particularly as most publicly listed banks are required to issue quarterly accounting statements. For example: prior to the crisis lenders and regulators made little effort to distinguish different types of non-performing loans. Today, a more sophisticated grading system helps classify bad loans more precisely by a variety of criteria, enabling lenders to properly account for risk and devise workout strategies.