United World Chinese Commercial Bank (世華銀行) took over Taiwan's worst performing grassroots financial institution, the Sungshan District Farmer's Association (松山農會) yesterday, the first such action since the Ministry of Finance launched a raid in early August against 36 problematic cooperatives.
The move aims to minimize the collateral impact on markets as a whole.
"A swift takeover can help stabilize the financial industry and avoid panic among depositors at the credit cooperatives," United World spokesman Chen Chien-chih said.
With a staggering 97 percent non-performing loan ratio, the Sungshan cooperative was the hands-down winner in terms of bad apples in the sector.
But with the government's NT$140 billion financial reconstruction fund (金融重建基金) -- a US-style Resolution Trust Corp (RTC) -- slated to compensate United World for losses prior to takeover of the Sungshan Farmer's Association, the worst choice appears to have the least risk.
"Since the non-performing loan ratio of Sungshan Farmer's Association is 97 percent, it means almost all of its outstanding loans will be paid for by the RTC. Whoever take over the co-op would only have a 3 percent risk [based on its outstanding loans], thus making Sungshan the least risky takeover among the 36 credit cooperatives," said Norman Yin (殷乃平), a banking and finance professor of National Chengchi University (
A bank official confirmed that the majority of bad loans would be eliminated.
According to the ministry's plan announced earlier this week, all 36 credit cooperatives will be taken over by around 10 local commercial banks by the middle of the month.
Taiwan's credit cooperatives, which have the highest overdue loan ratio among Taiwan's lenders, are often run or controlled by powerful regional political figures and have long been criticized for granting risky credits in exchange for support at election time.
Investors were skeptical about the takeovers, saying the credit of banks risked being weakened if they take over credit associations burdened by bad loans.
"Taking on too many troubled farmers' and fishermen's credit associations will slow down state-controlled banks," said Lin Tsui-pin, who help manages NT$45 billion (US$1.3 billion) of stocks at Prudential Securities Investment Trust Co.
Banks involved in the consolidation may be reluctant to take on the co-ops' useless collateral.
"Under current regulations the RTC will be responsible for all pre-merger losses [between banks and credit cooperatives]. After the merger is done, all new losses will be handle by the banks themselves. The biggest problem for the banks is that most credit cooperative collateral is farmland, which is very hard to resell, since the only qualified buyers are farmers," said Yin.
Taiwan law stipulates only registered farmers can purchase land designated for farm use.
Compounding the problem is the fact that the certified public accountants brought in to verify credit cooperatives books are incapable of appraising the collateral, making banks hesitant to takeover problematic cooperatives, explained Yin.
Bringing in qualified professionals to do the job may be a solution according to Yin.
The administration should learn from the UK where "the banks hire real estate actuaries to do the work through bankruptcy procedures."
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