New NPL standards needed now, pundit says

To avoid potential moral hazards, the Ministry of Finance should follow international standards and quickly adopt a stricter definition of the non-performing loans (NPL) for domestic banks, a pundit said yesterday.

"If international standards are adopted by the year's end, bank officials and shareholders will have to write off bad loans and detail losses on next year's financial accounting," Chen Chung-hsing (陳松興), president and CEO of the Taiwan Ratings Corp (中華信評), said.

Taiwan Ratings is a local partner of Standard & Poor's Ratings Services.

Though the plan to adopt a new NPL standard would force banks to accelerate write-offs and dent profits, Chen said that "They will return to financial health at an earlier date."

He made the comments during a seminar on the nation's financial reforms that was organized by the Taiwan Academy of Banking and Finance (台灣金融研訓院).

Local banks currently plan to adopt international NPL standards in April 2003.

Taiwan's NPL definition currently excludes loans where interest payments haven't been made in up to three months. Loans that have gone unpaid for six months are listed as as non-performing.

Using taxpayers' money to bail out some banks is inevitable, but Chen warned that moral hazards are likely, as failing banks may attempt to take advantage of the transitional period before the government's NT$1.05-trillion Financial Restructuring Fund (金融重建基金) is fully capitalized in 2004.

He said that a second accountants' opinion is necessary to ensure that a bank's books are not concealing bad loans.

But a ministry official appeared to sidestep the issue by mentioning the importance of financial reforms and a solid financial-supervisory system.

"Only when the banking sector returns to health will the nation's economy be revived," said Tsai Ching-nain (蔡慶年), deputy director general of the Bureau of Monetary Affairs, citing an IMF consultant.

Chen also urged the government to put more emphasis on corporate restructuring, which he said was behind some bank failures.

"Preventing corporate failures and bad loans, while encouraging financial reforms and corporate restructuring go hand in hand," he said.

Adding a word of caution, Chen Mu-tsai (陳木在), chairman of the Bank of Taiwan (台銀), said that banks should focus on their core business and avoid making high-risk investments.