The Hong Kong Monetary Authority has warned that although problem loans at SAR banks peaked in the third quarter, they might still need to increase bad-debt provisions in the second half. 'The problem-loan situation appears to have peaked out in the third quarter but I'm not expecting to see improvement in bad-debt provisioning until next year,' HKMA deputy chief executive David Carse said. This time-lag between peaks of problem loans and provisions is because some banks need to increase provisions for some problem loans, especially those whose borrowers are still in the middle of restructuring. At a seminar on corporate workouts hosted by the HKMA and the Hong Kong Association of Banks, Mr Carse said the authority would not reduce its provisioning requirement for those problem loans that had been rescheduled. 'The fact that a bad loan has been rescheduled does not necessarily mean it will become good again immediately.' Mr Carse said the HKMA required a rescheduled loan to be put at least in the third 'sub-standard' notch in the five-notch loan classification system, implying the bank should at least maintain a provision of 20-25 cents in a dollar to that loan. At the moment, a rescheduled loan could be upgraded in the system only when it started receiving interest for six consecutive months (or 12 months in case of quarterly repayment). Banks' provisioning levels would not improve immediately even if problem loans stabilised. The need to top-up provisions on an existing problem loan comes as restructuring of the borrower lengthens, which in effect postpones the date when repayment can resume and lengthens the loan's period of overdue. However, Mr Carse believes the improved economic conditions will ease banks' bad-loan problems. He said a recovering economy would help corporate and debt-restructuring processes because it would improve revenues and stabilise the value of the securities backing their bank borrowings. However, 'it's still very difficult to say when lending will pick up again', he said. Mr Carse reiterated the HKMA's support for the establishment of a corporate credit register in Hong Kong to provide banks with more accurate information about borrowers' debt exposure before granting new loans. Mr Carse said the register might need to go through some legislation processes to create laws making corporates disclose debt exposure information. Separately, Mr Carse expects the creditor banks of the troubled Guangdong Enterprises (Holdings) to reach a provisional restructuring proposal by the end of the year. But he declined to speculate how banks would amend the provisions against their existing exposure with the troubled entity. BANKING
