After a six-month investigation, the Control Yuan Tuesday concluded that the Ministry of Finance's standards for calculating non-performing loans (NPLs) distort the real condition of the deteriorating banking sector. Reporting that the standards are too lax, the agency demanded that the ministry rectify the problem.
Specifically, the Control Yuan report alleges the possibility that the ministry is hiding high bad loan figures by excluding loans whose interest payments haven't been made in three months. The ministry -- in contradiction to international practice -- only calculates as non-performing, loans that have gone unpaid for over six months.
"We demand the finance ministry quickly propose measures to correct the wrongdoing," Control Yuan member, Lin Chiou-shan (
Lin, along with four other members including Lin Ju-liang (
"Lax standards fail to reveal the reality and further delay a resolution of the problem, which will sooner or later overburden the nation's coffers," Lin said.
As much as NT$1.68 trillion, or 11.74 percent of bank loans were bad or may have turned bad by the end of March, according to statistics released by the nation's central bank.
Many industry watchers say both of these figures are low if calculated according to international standards.
The report also blamed the ministry for failing to establish an "exit mechanism" to cut down the negative impact of closing down bad-performing banks, adding that "the government can't keep on bailing banks out."
The Control Yuan, moreover, criticized the ministry for failing to deal with the booming NPL ratio until banks began failing and added that they were doing too little to prevent a "future moral hazard."
Meanwhile, as a future reference on the health of the nation's banks, the Control Yuan report suggested that the ministry use banks' capital adequacy ratio as a tool to assess their performance.
Citing the American model, the report added that banks, whose capital adequacy ratio drops below 6 percent, should be forbidden from managing certain types of transactions. And prompt corrective action should also be initiated when bank performance was found to have deteriorated, the report said.
The two Vice Finance Ministers Susan Chang (張秀蓮) and Sam Wang (王得山), however, refused to comment on the Control Yuan report.
On many occasions, Minister Lee Yung-san (
However, due to the current economic downturn, the ministry has been hesitant to take drastic measures, the banker-turned-minister said.
He recently said that if lending practices become too rigid, the government fears that some enterprises will not be able to secure the necessary capital to continue their operations, which would add to the current economic slump.
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