Taiwan is letting slip the opportunity to rebuild its weak banking sector after the Legislature failed to ratify the Resolution Trust Committee Fund Regulatory Provisions (金融重建基金設置及管理條例) in the recently closed session, an international rating agency said in a report last week.
Although recognizing efforts made in 2001 and last year to work through the sector's core bad-debt problems, "2003 to 2004 may be shaping up as a period of lost opportunities for Taiwan's efforts to create a robust and effectively functioning banking sector," the UK-based Fitch Ratings said in its June 13 report.
In the report, titled "Taiwan-ese Banks: 2002 Results and the Outlook for 2003," Fitch said it anticipates little or no change in the overall financial health of the sector this year, "Given the still weak economic growth prospects in 2003, while the approaching presidential elections threaten further politicization [ie postponement] of the reform process."
The report, authored by analysts Freda Cheung, Paul Grela and Tino Jang, said that local banks appeared to be moving proactively in cleaning up their balance sheets last year by disposing about four percent of total loans and reducing their non-performing loan (NPL) ratio to 8.85 percent from 11.29 percent in the previous year.
But with the government's failure to pass the RTC's new funding budget in the legislative session ended earlier this month, Fitch said it is concerned that "the improving trend ... may not achieve much noticeable further progress in 2003."
The Ministry of Finance has proposed to increase the available capital funds of RTC to NT$680 billion from some NT$40 billion of the NT$140 billion-fund after it cleared debts for 44 local financial institutions in the past years.
But due to the legislative delay in injecting new monies, which is designed primarily to cover the bailout of insolvent banks rather than acquiring non-performing loans from the entire sector as originally planned, "Banks may therefore be less able and motivated to continue to deal as aggressively with their core bad debt problems as seen in the recent past," Fitch said.
In an earlier comment published in April, the agency had urged no further delay in implementing the fund's package as a weak banking system poses risks to economic growth. Taiwan's economy is forecast to grow 2.89 percent this year, following growth of 3.54 percent last year and a contraction of 2.18 percent in 2001.
As the corporate sector is still depressed by sluggish economy and the construction and real estate sectors under financial stress, the banking sector already faces challenges such as high NPL levels and ongoing margin and profitability pressures.
Since the continuing delays in passing the RTC's new funding budget will create a difficult and challenging operating environment for domestic banks, the Cabinet has considered to hold a press conference this morning to highlight the need for the Resolution Trust Committee Fund Regulatory Provisions and five other draft financial bills, hoping legislators will be under pressure to hold an extra session later this month.
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