Taiwan Ratings is admonishing again over NPL problem

Taiwan Ratings Corp (中華信評), the local affiliate of Standard & Poor's, said the nation needs to increase the size of its NT$140 billion Financial Restructuring Fund (金融重建基金) to nearly NT$1 trillion, in order to tackle the banking sector's non-performing loan (NPL) problem.

Taiwan Rating, which has a long-standing disagreement with the Ministry of Finance on the actual NPL ratio, says the situation continues to deteriorate.

"In accordance with international standards, we have concluded that the nation's NPL ratio stood at 15 percent -- or NT$2.18 trillion -- in 2001, based on a standard formula and actual transactions by banking clients," said Susan Chu (朱素徵), an associate director at Taiwan Ratings.

The finance ministry recently proposed increasing Restructuring Fund capital by an additional NT$180 billion, which is still pending legislative approval.

Given the fact that local property prices have declined by about 30 to 40 percent from their peak in the mid-1990s, most non-performing collateral is expected to depreciate by 50 percent, the report estimated. Chu said NT$950 billion -- or 10 percent of the nation's yearly NT$9.5 trillion gross domestic product (GDP) -- is needed to tackle the bad loan problem.

The central bank, however, previously said the nation's NPL ratio reached 11.74 percent -- or NT$1.68 trillion -- as of March, including loans under observation.

Citing its Tuesday report, Chu added that the reason the rating company has concluded a higher NPL ratio than the government is because of "agreements made between banks and some borrowers to hide potentially bad loans."

The company's report, therefore, said that the operating risk in Taiwan's banking industry continues to grow, and that the outlook for the industry remains negative.

Of a total of 53 domestic banks, only 13 larger banks are financially viable, while the asset quality of the other 40 banks and local-level financial institutions are deteriorating, the report said.