• Thu
  • Sep 18, 2014
  • Updated: 8:51am

Let the bankers say no

PUBLISHED : Monday, 01 September, 2003, 12:00am
UPDATED : Monday, 01 September, 2003, 12:00am

Recapitalising China's Big Four banks may be a necessary condition for a healthy financial system, but it is hardly a sufficient one ('Massive bailout proposed for banks', South China Morning Post, August 26).


Without thorough reform and remodelling of internal practices and procedures, another train-wreck is merely a matter of time.


The banks have accumulated a massive burden of non-performing loans (NPLs). In some cases these have resulted from state-directed lending to state-owned bodies or to 'strategic' infrastructure projects.


The first necessary reform is to allow bank management the use of the word 'no' when asked or instructed to lend by officialdom. While there is a role for a separate development bank, commercial banks (which take deposits from the retail market) should not be involved with officialdom in this way.


The second necessary reform is to teach managers when to say 'no'. This requires thorough retraining, otherwise new NPLs will swiftly replace the old.


The last major reform needed is the restructuring of the banks themselves - they are simply too large to manage efficiently. The UK National Health Service provides an awful example of what happens to costs and service quality when institutions grow too large.


Ideally, the Big Four would be broken up into smaller institutions with clean loan portfolios. Such 'new' banks could then start anew with modern procedures, systems and controls, using industry best practice.


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