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Ease of loan rollovers criticized

The government's practice of bailing out financially distressed enterprises with loan rollovers has put extra burden on the nation's banking sector and reversed efforts to push forward financial reforms, pundits said yesterday.

"It's a money pit that can never be filled and will get bigger if more money is injected into it," said Cheng Cheng-mount (鄭貞茂), vice president of Citibank Taiwan.

Cheng yesterday gave his endorsement to a recent Control Yuan report, which corrects the central government's administrative failure to carry out financial reforms.

According to the report released last week, 219 troubled enterprises received a total of NT$390 billion in government-instigated loans from banks over the past four and a half years, and NT$112 billion, or 28.8 percent of those loans, have turned into non-performing loans.

Eight out of the top 10 conglomerates with the highest borrowing record also failed to pay back their government-backed loans, hurting the banking sector's health by generating some NT$85 billion in bad loans, the Control Yuan report said.

The watchdog body concluded that the central government has exploited its administrative power to intervene in the banking sector's credit-and-risk policies and has thereby stalled a future "potential financial crisis."

The bail-out loan mechanism was set up by the former KMT government when Lee Teng-hui (李登輝) was president to help local businesses weather the 1997 Asian financial crisis.

It has continued to be used by President Chen Shui-bian's (陳水扁) administration.

Hsu Chen-ming (許振明), an economics professor at National Tai-wan University who used to sit on the mechanism's board, shared his view on the bailout plan's fallout yesterday.

"The government can't keep playing Santa Claus and impose [such] moral hazards on banks, which do nothing but comply with the government's policies to grant high-risk loans to troubled businesses," Hsu said.

"The government has not only infringed on the market mechanism but also asked banks to pick up the tab," Hsu said, echoing one of the conclusions reached in the Control Yuan report.

He said that supporting measures including a business-restructuring plan and a management reshuffle should be in place before under-capitalized businesses get new financing.

Hsu added that the bail-out plan, moreover, should only work as a short-term financial fix to meet cash-flow needs and loan rollovers should not be extended over and over again to businesses whose fundamentals are not solid.

Cheng was also critical of what he said was the government's belief that "businesses are too big to fail."

He said that the government's bail-out relief fund, in the past, mostly came to the rescue of "big conglomerates," whose messes were mostly "too big to solve."

Cheng argued that banks should not pick up the tab on the government's behalf.

"Instead, the government should draft a bill to allocate money itself to bail troubled businesses out," he said.

Both Cheng and Hsu are pessimistic that the government may have to pay a huge price for financial reforms if local businesses continue to generate new non-performing loans to deteriorate banks' balance sheets.

As of March, the nation had a total of NT$1.2 trillion, or 8.6 percent, in non-performing loans.
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