Creativity can ease burden of bad loans
Hong Kong banks may collectively unveil about HK$50 billion in bad loans on their books once the present reporting season is complete, based on trends so far evident in published results.
This is a large amount, and, although the sums pale into insignificance when stacked against the mountain of bad debt accumulating in Europe, SAR banks could learn from the creative techniques being explored on the continent to turn bad money into good.
Management consultants McKinsey warned in a recent study that Europe was awash with a bad-debt burden that was steadily growing.
'European banks, companies and public institutions are owed some US$900 billion of non-performing credits and, as the economy of the region slows, its credit troubles are growing,' researchers noted in the present McKinsey Quarterly.
In the United States, banks face an equally disturbing trend.
Latest data released by the Federal Deposit Insurance Corp (FDIC) show that, as in Hong Kong, credit-card defaults are on the march in the US, leading bad loans and bad-debt charges to record levels.
US banks set aside US$15.2 billion in provisions for bad loans in the fourth quarter of last year, an increase of US$5 billion, or 48.8 per cent, from a year earlier, the FDIC said.
It noted that asset quality indicators continued to worsen and that net charge-offs of US$12.7 billion were up by US$3.9 billion or 44.3 per cent, representing the highest total reported by the industry.
In Hong Kong, bankers have mounted a concerted lobby against relaxed bankruptcy provisions, which, they say, have led to customers declaring bankruptcy to escape paying their credit-card debt. Banks that have so far reported have revealed surging increases in credit-card defaults.
However, the FDIC data show that the experience of US banks mirrors that of their Hong Kong counterparts.
US banks charged off US$3.5 billion in unrecoverable credit-card loans in the final quarter, which was up 25.8 per cent on a year earlier, the FDIC reported.
The net charge-off rate on credit-card portfolios rose to a record high 6.26 per cent.
Even with the stepped-up rate of charge-offs, which takes bad loans off the books, the value of bad loans remaining on the books of US banks rose in the quarter by 27.9 per cent.
This has lead to a handful of large banks in Europe discerning the seeds of a new business in the mounting pile of bad debt being accumulated on the continent, according to McKinsey.
As a result, they are developing specialist businesses to manage their own and other companies' non-performing credits on an industrial scale, using recovery processes tailored to each type of credit and charging fees of 10 per cent to 15 per cent of the amount recovered.
Despite the fees, the debt-recovery expertise of these banks means their clients should be better off for using their services.
The potential clients of such banks include other banks that on average hold 45 per cent to 50 per cent of a country's non-performing credits; industrial companies, which hold 40 per cent; government institutions, which hold the rest; and securitisation houses that buy non-performing credits from these lenders.
Hong Kong debt-recovery techniques are notoriously heavy-handed and the majority of complaints made to banking regulator, the Hong Kong Monetary Authority, concern the stand-over tactics used by some.
Of a total 880 complaints from customers about banks last year, 431 concerned debt collection, with customers reporting they had been intimidated and, in some cases, threatened with violence.
McKinsey noted that Europe also had a galaxy of tiny firms that offered debt-recovery services, which were occasionally used by the banks and industrial companies to chase individual debtors.
However, for banks and industrial companies to outsource their entire bad-debt portfolio to outsiders with national or international coverage is something new.
European banks were also now looking more kindly on the prospect of outsourcing the management and not just the collection of their bad debt to emerging specialists in the field, McKinsey said.