Asian banks hold on to their antediluvian ways

PUBLISHED : Wednesday, 10 September, 1997, 12:00am
UPDATED : Wednesday, 10 September, 1997, 12:00am

Asian bankers are not used to someone checking over their shoulder. For years, the guiding principle that more lending equalled more profit worked fine. The unwinding of the region's asset boom means attitudes must change.

Too much money was lent to too many. Now, unfamiliar disciplines, such as credit assessment, risk management and, horror of horrors, provisioning, are being forced on those more accustomed to writing blank cheques.

Asian bankers are, of course, not unique in being seduced by the apparent permanency of a property-driven lending boom. The difference is in the numbers.

They have been some of the world's most aggressive lenders, dominating league tables. This was once considered a strength, but painful restructuring looms with changed economic conditions.

Any sustained downturn will inevitably be magnified in banks' profitability. With Thailand, Malaysia and Hong Kong having loan-to-GDP ratios above 130 per cent, they are highly geared plays on national economies.

The story is a common one. Banks operating in a booming economy dominate credit creation. High saving rates and easy foreign funding bolster balance sheets. Loan growth accelerates with little regard for cyclical downturns. Property development dominates with scant attention to concentration risk. Profits boom.

The picture is not uniform, but the regional similarities are striking.

Goldman Sachs identifies structural failures led by government-mandated lending for socio-economic causes. Similarly, uneconomic lending to related parties is common in Malaysia, Thailand and Indonesia.

Vast expansion in the scale and diversity of economic activity has not been reflected in banking practice. Despite the appearance of modernity - Asian banks all offer glitzy derivative products - management remains antediluvian.

The length of the preceding expansion and lax regulation have compounded problems. Most importantly rules governing bad debt provision are nebulous with banks able to delay realisation of losses.

With reserve requirements - one of the most powerful tools available to Asian regulators - dramatically reduced in many countries banks face a rising tide of bad debts with very little protective cushion.

That situation has been compounded among finance firms. Across the region the same pattern of non-bank firms aggressively bidding for deposits and chasing high margin - risky - lending has aggravated things. Very often these are unconsolidated vehicles for taking further credit exposure where formal limits have been imposed.

The fallout from the summer financial turbulence will rattle through Asian banking systems for the next year. Higher funding costs, big foreign exchange liabilities and falling property prices will hit profitability.

Banks are in the business of mediating between savers and borrowers. Most are blessed by their depositors' thrifty habits while incipient bond markets hardly threaten their core lending activity. That is a shame for all concerned.

The modern lexicon of banking is dominated by notions of risk. For those with big exposure to financial instruments, the holy grail remains real-time knowledge. Asian banks face perhaps the simplest yet most pernicious risk in their treatment of credit risk.

Setting tough lending criteria is hard in a market where others are undercutting. Then again, how is risk to be accurately measured? Enter bond markets and their clinical disregard for relationships and all that.

Quite simply the aggregate of financial variables that bankers must consider when pricing a loan are too complicated without a little assistance.

Better regulation will mitigate the worst excesses, but the development of capital markets is the only long-term solution to manage and accurately price risk in an advanced economy.

Disintermediation is inevitable, the survival of dodgy banks is not.