Fri, May 05, 2000 - Page 17 News List

Chung Shing loan scandal just the tip of the iceberg

HOW MUCH FURTHERAfter recent a loan scandal triggered a run on the Chung Shing Bank, both consumers and investors alike are wondering whether this is an isolated incident or the precursor to widespread mayhem in the financial industry

By Stanley Chou  /  STAFF REPORTER

"Most domestic commercial banks currently have serious overdue-loan problems. Among the 15 new commercial banks, at least one-third have similar problems like Chung Shing Bank, or even worse. In Taiwan's banking industry, using dummy accounts to get illegitimate loans has been a popular phenomenon. It has created outrageous overdue loan ratios of more than 80 percent," the academic said.

According to the latest disclosure by the Central Bank of China (央行), the average overdue loan of Taiwan's 56 commercial banks was as high as 5.03 percent at the end of March, or 0.15 percentage points higher than the end of last year. The total amount of overdue loans reached a new record of NT$688 billion (US$23 billion).

Besides the new commercial banks, dozens of government-controlled banks and business banks, which serve medium and small business, also have serious overdue loan problems. And there is good reason for this, analysts said.

"Kickbacks and bribery have been the basic incentives that created record bad loans in the state-run banks for decades, and the new commercial banks also followed," said a fund manager of a local fund house.

Which banks are next

If one wants to know which banks might be the next one to be hit by a crisis and bank run, it is not hard to find out from the overdue loan figures disclosed by these institutions (see graphic).

"Several questionable banks with extremely high overdue loan ratios are the Taitung Business Bank (台東中小企銀) with a 9.77 percent overdue loan ratio and Taiwan Development Investment Trust (台開) with a whopping 21 percent, compared with Chung Shing Bank's 3.72 percent [as disclosed by the banks themselves]. Actual figures for most banks should be more than double their disclosure figures. One of the reasons that Taitung Business Bank has not been forced to close is the largest shareholder has been Yu Huai-yin (游淮銀), a legislator, though recently he has named his son-in-law to replace him as chairman of the bank -- therefore holding off outside pressure. There is a possibility that the Chung Shing Bank incident could trigger a domino effect in the market and spark a financial crisis," the academic said.

When so many banks are experiencing similar difficulties, why was Chung Shing Bank singled out? Analysts see the situation as more a political one than economic one.

"The bank run crisis of Chung Shing was initiated from the default of Taiwan Pineapple (台鳳), one of the most aggressive players in the stock market. According to my observations it was political," the academic said.

"During the presidential election, the Wang family, who controls the Chung Shing Bank and is a long-time KMT political ally in Kaohsiung, had been reluctant to support Lien Chan (連戰), the KMT presidential candidate. After the KMT defeat in southern Taiwan, it was time for KMT to punish the betrayal," the academic said.

A senior executive of a foreign securities company further elaborated. "Part of it was the presidential election, but the real stimulus of the investigation is that the KMT wants to disconnect any possible trouble that the Chung Shing Bank scandal might give KMT after May 20. It is why the agencies have to launch a massive investigation right now. If they don't and Chen Ting-nan (陳定南), the next justice minister, conducts his own investigation, the KMT and its business connections could be devastated," said the anonymous executive.

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