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Level playing field offers banks a fresh start

`After living in both the UK and the US for a while and doing banking in those countries, I realized that the service there was inferior to ours.'

The profitability of Taiwan's major financial holding companies has changed drastically recently. Credit problems arising from the habit of issuing two cards -- a credit card and a cash card -- to applicants, have damaged some previously profitable companies. This reminds me of earlier times, when state-run banks' performance was inferior to that of private banks.

Local banks' service and efficiency was considered inferior to that of foreign banks before the banking sector was opened to private companies in 1990. However, after living in both the UK and the US for a while and doing banking in those countries, I realized that the service there was inferior to ours. I always had to wait in a long line to withdraw money -- in Taiwan, these banks would have been "condemned to death" -- and tellers' speed in counting money was far from satisfactory. Not to mention that I had to sign numerous documents to get a loan. My conclusion was that local banks' service was not at all inferior to their foreign counterparts.

Private banks began appearing in Taiwan in 1990. At first, each bank had only about a dozen branches, but they quickly became people's favorites. One day, an official from the Ministry of Finance who was inspecting my state-run bank said the service of state-run banks was poor by comparison. He gave some examples, saying that about twice as many people called to complain about public banks than private banks, and that there were also more complaints about how state-run banks were managed.

I thought to myself: "The number of clients of state-run banks is a dozen times higher than that of private banks, so of course they receive more complaints." But I dared not refute his words -- I was afraid he would reject my application for new branches the next year if I argued with him.

At one point, I pretended to be a customer in order to test the service level at different branches. The outcome was unsatisfactory, but there was really not much difference between state-run and private banks. My conclusion was that private banks were as bad as public ones in terms of service. Only one private bank was relatively better.

Performance as measured by return on assets -- or profit generated for each dollar of assets -- was very good at private banks, making the old state-run banks a target of public criticism. Those pointing the finger at state-run banks, however, failed to mention their policy-related responsibilities -- especially to provide financing and relief aid in times of calamity.

But the greatest restriction on state-run banks were the limits on staff numbers. Even if business grew, the banks had to follow government policy on staff streamlining. To promote credit cards and new consumer loan services, state-run banks needed to recruit more staff, but owing to the restrictions they had to step back and let foreign-owned banks and new local banks rule the roost.

The relocation of Taiwanese companies to China dealt the fatal blow to provincial-level banks, because both provincial assembly and national government policy subsequently forced them to make small and medium-sized companies their main customers. In addition, every year the government increased the policy requirements for credit given to these Taiwanese companies.

Starting in 1990, Taiwanese businesses began moving to China or hollowing out their firms in Taiwan, leaving state-run banks with skyrocketing non-performing loans.

Meanwhile, up-and-coming private banks dedicated themselves to providing consumer loan services. They were allowed to make full use of "commercial collectors," creating a performance miracle of high profits and low bad debt. As a result, state-run banks became synonymous with inefficiency and outdated values, while foreign and local private banks became blessed -- and state-run banks began spending hundreds of millions of NT dollars on foreign experts.

But this is all in the past. As a result of the continuous outflow of companies to China, the nation's misery index has risen every year. In addition, the three major tools of foreign and new local private banks -- consumer loans, commercial collection and servicing only specific customers -- are being blunted, while credit card services are bogged down in uncollectible card debt. This has shaken up the profit rankings, and formerly good performers have become average firms.

However, this might mark a new start. The credit card debt troubling private banks should be resolved by the end of the year. And state-run banks, which have been plagued by the relocation of companies to China over the past decade, are casting off the shackles of government control and have acquired the power to offer performance bonuses, undertake organizational reform and recruit and promote personnel.

State-run and foreign and private local banks are now on an equal footing, and this should give them an equitable fresh start.

Huang Tien-lin is a national policy adviser to the president.

Translated by Eddy Chang and Daniel Cheng
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