Cooperatives to face tough rules

Minister of Finance Lee Yung-san (李庸三) said yesterday that the ministry has implemented a three-tier risk control mechanism to strictly regulate future lending by debt-burdened grassroots financial institutions.

"The goal of taking the corrective action is to reduce grass-root financial institutions' non-performing loan ratio and to improve their business practices," Lee said yesterday during a press conference after returning from a nine-day trip to an APEC meeting in Mexico.

The ministry's three-tier risk control mechanism prohibits credit cooperatives with an NPL ratio above 10 percent from absorbing new savings from non-members, offering interest rates on savings that are higher than that of Taiwan Cooperative Bank (合作金庫) and granting unsecured loans or loans to their own board members to prevent "moral hazards," Lee said.

The mechanism also forbids credit units whose NPL ratio is between 15 percent to 25 percent from granting new loans over NT$5 million, while those whose NPL ratio reaches over 25 percent will not be allowed to provide extensions on old loans or establish new branches.

According to local media reports, representatives of the troubled credit cooperatives voiced strong opposition to the new rules, saying "the ministry's new measures will threatened our survival. It seems to be intended at wiping us out."

In response, Lee yesterday said the risk-control mechanism will insure that credit cooperatives with sound management will survive.

He said that many credit units need to find their niche market to compete with bigger banks. He also expressed concern over the growing NPL ratio at the nation's 317 credit cooperatives, which rose to 18.9 percent -- or NT$190 billion. Farmers' credit associations have the highest NPL ratio -- 21.5 percent -- compared to a 17.5 percent average at fishermen's associations and 7.5 percent for domestic banks.

Pressured by reporters, Lee, nevertheless, did not specify the ministry's timetable to lower grassroots financial institutions' NPL ratio since he had previously vowed to reduce the nation's NPL ratio among banks down to below 5 percent within two years.

Business transactions of some 160 cooperatives may have to endure restrictions as a result of the ministry's new measure.

Gary Tseng (曾國烈), director general of the ministry's Bureau of Monetary Affairs, said that the ministry's duty is to maintain financial order and prevent further bank failures.

"But it's even more important to safeguard depositors' rights," he said.

If a credit cooperative fails, the government has to use taxpayers' money -- the Financial Restructuring Fund -- to bail them out.

Lee encouraged grass-roots financial institutions to further consolidate themselves through mergers and acquisitions to boost competitiveness.

Seventeen cooperatives in Taipei County are already forming a plan to jointly establish a commercial bank, Tseng said.

"They are solid institutions, which together have net assets of over NT$20 billion," he said.

Tseng said that the proposed commercial bank is scheduled to be launched in October.

Nine other credit cooperatives central and southern Taiwan are also discussing a merger plan initiated by Tainan's Third Credit Cooperative (台南三信).