The nation’s credit conditions remain supportive for local banks going into the third quarter, even if global trade and geopolitical tensions are undermining investor confidence, while Taiwan’s economic momentum and market uncertainty ahead of next year’s presidential election remain a factor for the profitability outlook for lenders. That said, ample market funds and increasing competition in the banking industry are increasing pressure on profitability and business models.
The most important event in the financial sector this month is the problematic loans 13 banks made to domestic trading company New Site Industries Inc and three affiliated companies. The four firms secured nearly NT$7.32 billion (US$235.5 million) in loans then halted repayments and suddenly could no longer be reached.
The Financial Supervisory Commission said that the banks faced potential combined losses of NT$3.59 billion, with Taiwan Business Bank, O-Bank Co, Mega International Commercial Bank, Yuanta Commercial Bank and Taiwan Cooperative Bank the most affected.
This was the third such incident the local banking industry has experienced in the past four years, after massive questionable loans were made to Tingsing Trading Co in 2016 and Ching Fu Shipbuilding Co in 2017. Although these incidents are individual cases and different banks were involved, they all involved more than 10 banks and the combined loans in each case totaled tens of billions of New Taiwan dollars.
The New Site Industries case involves accounts-receivable financing, an asset-financing arrangement that allowed the Taipei-based firm to obtain loans by transferring its receivables — money not yet paid by its customers, including companies of conglomerates Formosa Plastics Group and Shinkong Group — to banks. Theoretically, this type of financing helps companies free up capital that is stuck in unpaid debts, while they do not have to worry about high collateral.
However, accounts-receivable financing also transfers the default risk to banks and, most importantly, if the outstanding invoices or documents showing money owed were fake and the transaction records forged, they are simply scams.
With a great effort from all sides, banks have continued working to lower default risk in recent years as financial scandals erupted one after the other. The latest incident shows that there is still room for improvement. New Site Industrials is a veteran trading company and has done business with local banks for decades, while its customers are mostly large companies or corporations, not small firms or individuals. The banks appear to have lowered their guard during the financing process.
When a financial scam is uncovered, banks need to deal with compensation claims and do damage control, especially regarding the loss of confidence among the public. Banks cannot afford to be complacent or turn a blind eye to risk, because fraudulent tactics are constantly evolving. They need to pay attention to every credit evaluation and loan approval process, and should not be hasty or sloppy.
Financial sector funds come mainly from depositors, while banks are set up based on public trust, so they must manage their funds properly to minimize risk.
With this latest scandal, banks need to tell people how they plan to avoid more such incidents, adjust their credit control mechanism, and improve education and training for their personnel. After all, this is their responsibility and obligation to society.
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