Taiwan's government is battling to cope with a record recession and a serious banking mess. In a worst-case scenario, deteriorating loan quality and a decline in profitability portends a banking collapse during a period of political instability and weakening demand for high-tech exports. Traditional sectors like property, textiles and petrochemicals face problems with repaying their debts. And the New Taiwan dollar has been weakening for the past year and an half.
Ministry of Finance officials are beginning to address the pro-blem of bad loans. Cleaning up non-performing loans (NPLs) is a key to restoring health to the financial sector. It will also set the stage for needed consolidation and privatization among one of the most overcrowded and fragmented banking sectors in Asia.
Some analysts suggest that Taiwan's NPL ratio could be 10 percent or 15 percent. Official figures are much lower due to a narrow definition used to identify bad loans and the exclusion of troubled credit unions. Taiwan has around 400 credit cooperatives and fishermen's and farmers' credit associations. According to one estimate, at least NT$950 billion will be needed to sort out all the bad loans.
Bank consolidation has been encouraged by the passage of laws offering tax breaks and other incentives for mergers and acquisitions as well as allowing companies to use stock instead of cash for mergers and acquisitions. The Financial Holding Company Law (
However, most of the mergers have been mergers that involved government-controlled banks, including their mandated takeovers of weak private banks. For example, the government-run Taiwan Cooperative Bank merged with Chinfon Bank. Among private banks, Taishin International Bank joined with Dah An Commercial Bank last year, but that was small potatoes.
One mega-merger involved state-owned Bank of Taiwan, Land Bank of Taiwan and Central Trust of China. This new unit will become Taiwan's largest bank in terms of loans and deposits with combined assets of NT$3.9 trillion (over US$120 billion) as of the end of 2000. It would control 20 percent of all deposits and almost 20 percent of all loans.
A recent bidding process to acquire TaipeiBank involving four other financial groups was won by Fubon Financial Holding, a leading financial conglomerate partly owned by Citigroup. This was an important step towards consolidation of 52 banks serving a population of 23 million.
It was also a step towards de-nationalizing banking assets since the Taipei City Government controlled TaipeiBank. With the 13 government-controlled banks holding a combined market share of nearly 55 percent, that leaves the privately-held banks have market shares of 1 percent to 2 percent or less.
Offering its own stock in exchange for full ownership, the bid by Fubon put the value of TaipeiBank at US$2.4 billion. With combined company assets of about US$32 billion as of the end of last year, it will become the sixth-largest bank by assets and the largest in the private sector. Fubon Financial would also be among the largest 10 financial groups in Asia outside Japan in terms of market capitalization.
Of course, before mergers can occur, NPLs must be sorted out to make takeovers attractive. However, this will be a daunting task. While officials in Taipei insist that 8 percent of bank loans are non-performing, private-sector analysts estimate the level to be double that figure and rising. That would be equivalent to around 20 percent of Taiwan's GDP. (Japan's crippled banking system has bad loans that represent 26 percent of GDP.)
Happily, several banks have announced bad-debt write-offs or entered agreements to sell problem loans to companies specializing in debt recovery. International investment banks to set up debt-salvage companies, commonly known as asset management companies (AMCs), in joint venture with domestic firms to sort out NPLs. This usually requires layoffs and the sale of unproductive assets so that the debtor's businesses are profitable enough to make them attractive to prospective buyers.
Government-owned First Commercial Bank, Taiwan's fourth-biggest bank, sold some of its bad loans to Cerberus Asia for an estimated 20 to 25 percent of the face value of US$370 million. Another government-controlled bank, United World Chinese Com-mercial Bank, disposed of bad loans worth about 4.5 percent of its total loans or about US$514 million.
Hua Nan Financial Holding, owner of Taiwan's fifth-largest lender, is expected to write off about US$1.5 billion of bad loans.
Taipei has also passed the Financial Institutions Merger Law (
The financial restructuring fund is modeled on the US Resolution Trust Corp that used taxpayers' money. According to the finance ministry, the size of the Financial Restructuring Fund will be increased from NT$140 billion to NT$600 billion. This is still but a fraction of the total outstanding bad loans that are estimated to be NT$2 trillion. And domestic banks already wrote off about NT$140 billion in NPLs in 1999.
Of course, this gives rise to a potential moral hazard and conflict of interest between the government and buyers. In this sense, it would be better to rely upon privately owned AMCs to sort out the mess in the financial sector.
Another non-trivial source of difficulties is that banking operations tend to be terribly opaque and there is a history of lending to clients whose dubious business or credit histories are due to political connections. While banks must write off existing bad debt, they must also improve their lending practices to avoid additional NPLs.
Taipei is overseeing progress in the right direction in its financial sector. However, there must be sufficient political will to carry out the remainder of the reforms. This requires that the government indicate it will take the political heat over layoffs required to achieve productivity gains that will encourage mer-gers. Perhaps most importantly, clear signals should be sent that all state banks will be privatized with due haste.
Christopher Lingle is professor of economics at Universidad Francisco Marroquin in Guatemala and global strategist for eConoLytics.com.
Recently, China launched another diplomatic offensive against Taiwan, improperly linking its “one China principle” with UN General Assembly Resolution 2758 to constrain Taiwan’s diplomatic space. After Taiwan’s presidential election on Jan. 13, China persuaded Nauru to sever diplomatic ties with Taiwan. Nauru cited Resolution 2758 in its declaration of the diplomatic break. Subsequently, during the WHO Executive Board meeting that month, Beijing rallied countries including Venezuela, Zimbabwe, Belarus, Egypt, Nicaragua, Sri Lanka, Laos, Russia, Syria and Pakistan to reiterate the “one China principle” in their statements, and assert that “Resolution 2758 has settled the status of Taiwan” to hinder Taiwan’s
Singaporean Prime Minister Lee Hsien Loong’s (李顯龍) decision to step down after 19 years and hand power to his deputy, Lawrence Wong (黃循財), on May 15 was expected — though, perhaps, not so soon. Most political analysts had been eyeing an end-of-year handover, to ensure more time for Wong to study and shadow the role, ahead of general elections that must be called by November next year. Wong — who is currently both deputy prime minister and minister of finance — would need a combination of fresh ideas, wisdom and experience as he writes the nation’s next chapter. The world that
The past few months have seen tremendous strides in India’s journey to develop a vibrant semiconductor and electronics ecosystem. The nation’s established prowess in information technology (IT) has earned it much-needed revenue and prestige across the globe. Now, through the convergence of engineering talent, supportive government policies, an expanding market and technologically adaptive entrepreneurship, India is striving to become part of global electronics and semiconductor supply chains. Indian Prime Minister Narendra Modi’s Vision of “Make in India” and “Design in India” has been the guiding force behind the government’s incentive schemes that span skilling, design, fabrication, assembly, testing and packaging, and
Can US dialogue and cooperation with the communist dictatorship in Beijing help avert a Taiwan Strait crisis? Or is US President Joe Biden playing into Chinese President Xi Jinping’s (習近平) hands? With America preoccupied with the wars in Europe and the Middle East, Biden is seeking better relations with Xi’s regime. The goal is to responsibly manage US-China competition and prevent unintended conflict, thereby hoping to create greater space for the two countries to work together in areas where their interests align. The existing wars have already stretched US military resources thin, and the last thing Biden wants is yet another war.