In an effort to clean up Taiwan's grass-roots financial system, the Ministry of Finance recently ordered two government banks to take over seven poorly performing farmers' credit cooperatives in southern Taiwan. However, these credit cooperatives will not be shut down. They will continue to trade as branch operations of the two state-owned banks, the Taiwan Cooperative Bank and the Land Bank of Taiwan.
Undoubtedly, the ministry's massive crackdown was justifiable; though it came somewhat late. The seven cooperatives had long been operating in the red, with non-performing loans making up to 60 percent of total lending. But the crackdown was seriously flawed and fell short of expectations for deeper reforms.
First, it was wrong to allow the ailing cooperatives to stay in business. These cooperatives were in trouble mainly because of a steadily withering agricultural sector, the primary market for them and numerous other such operators. This market can only be expected to shrink further, rather than expand, amid stronger competition from imports in the years ahead as a result of Taiwan's entry into the WTO.
With such poor market prospects, business for these cooperatives is unlikely to improve, much less undergo a vigorous turnaround any time soon, despite the change in management. They may even become liabilities to the two government banks ordered to take them over. Problems have already arisen for the 10 state banks that were instructed to assume management of 36 other credit institutions in a separate ministry-organized clampdown in August last year. It is reported that the overdue-loan ratio of some of these banks has increased as a result of taking over the many questionable debts and assets of the cooperatives.
As in the previous case, the seven cooperatives are to be turned over to the two government-designated banks only after the ministry has cleared all of their losses, estimated at more than NT$10 billion. The ministry will plug the financial gaps with funds to be made available from the newly created Financial Restructuring Fund (FRF). In the August takeover deals, more than NT$70 billion from the fund was spent to offset losses incurred by the 36 cooperatives.
Such deals raise two major questions. One is the question of fairness. When the ministry decided to use money from the FRF to subsidize the takeover of the troubled cooperatives and then transfer them to the government-owned banks, it was effectively creating wealth for the state sector at the expense of taxpayers.
Besides, the takeover deals run counter to the government's privatization policy. There is no point in the government expanding its banking operations at a time when Taiwan needs to downsize its state sector to allow better use of resources and to ensure fair competition in the marketplace.
Indeed, the ministry's use of the FRF to clean up bad debts, while refusing to allow unviable cooperatives to shut down, violates the primary purpose of the fund. When the fund was created last year, it was designed to raise money for the government to help dispose of bad loans and at the same time force the seriously ailing institutions out of the market for good. It would be more appropriate for the ministry to allow the cooperatives, or any other banking institutions which have no chance of being turned around and becoming profitable again, to be liquidated by the forces of the free market. The sale of the ailing institutions on the open market would also enable the FRF to claw back some of the funds taken from it to help expedite debt disposals.
It is important to get the money back if the ministry does not want to see the FRF run out of money so fast that its ability to fund future rescue operations is crippled. The FRF can legally raise only a maximum of NT$140 billion. After subsidizing the takeovers this time, the FRF will have used up more than half of its resources. Any attempt to lift the legal ceiling of the FRF would be politically unfeasible, unless the fund can be utilized in a more effective way, as originally stipulated.
Judging from the way the ministry dealt with the credit cooperatives in the two rounds of crackdowns, officials at the agency are still quite conservative and unwilling to take bold steps to force the consolidation of the banking industry even though many new laws and institutions, including the FRF, are in place to push for fundamental reforms, such as bank acquisitions and mergers, auctions of bad debts and the restructuring of hopelessly weak institutions.
Officials still seem to believe that banking institutions must not be allowed to fail, for fear it will cause runs on the banks, undermine market stability and place depositors' interests at risk. But the problem is that if the government continues to reject the possibility of closing banks, it will never find it easy to implement crucial structural reforms. And if depositors are always fully protected, they will not take much trouble over selecting their banks, eliminating a crucial means of weeding out the inefficient operators.
Tseng Kuo-ping is a freelance journalist based in Taipei.
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