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It is a great pleasure for me to be here in
Beijing to participate in the Second Non-Performing
Loan (NPL) International Forum. I would like to
give you a briefing about Taiwan's public sector
experience in NPL resolutions. My presentation
will be divided into four sections. Section One
discusses the role of the government in NPL resolutions.
Section Two analyzes the problems and difficulties
encountered by asset management corporations (AMCs).
Section Three presents pros and cons of government
involvement in NPL resolutions. I shall then close
with a brief conclusion.
I. Government Involvement in NPL Resolutions
In view of the increasing NPL ratio, the Taiwanese
banks have strengthened credit risk management
and made use of the provision of loan loss reserves
to write off bad loans in recent years. The NPLs
written off by domestic banks amounted to NT$140
billion in 1999 and NT$163 billion in 2000. However,
NPLs continued to increase in the first nine months
of 2001 and are likely to increase further in
the coming months.
The rising number of NPLs of Taiwanese financial
institutions has alarmed the banking sector. The
rapid growth of NPLs and the magnitude of NPLs
have become unmanageable by banks themselves.
Obviously, there is a need for the government
to assist the banks in reducing their NPL ratios
in order to prevent a financial crisis.
Government involvement in NPL resolutions has
taken on various forms. First of all, the Central
Bank cut the reserve ratio on deposits for banks
in February 1999. This was followed by a tax reduction
for banks. The Ministry of Finance reduced the
gross business receipt tax (GBRT) for banks from
5% to 2% in July 1999. The GBRT rate will be further
cut to zero effective January 2006. The extra
revenue derived from lowering the required reserve
ratio and cutting the gross business receipt tax
rate, estimated to be NT$35 billion (or US$1 billion
equivalent) per year, has been earmarked exclusively
for the write-off of bad loans.
Moreover, the government has provided a friendly
legal environment to accelerate the disposition
of banks' non-performing assets. The Merger Law
of Financial Institutions (MLFI) was enacted on
November 24, 2000. The Law provides the legal
framework for the establishment and operation
of the Taiwan Financial Asset Service Corporation
(TFASC) and Taiwan Asset Management Corporation
(TAMCO). Commercial banks may dispose of NPLs
through TAMCO and an independent third party,
TFASC, without going through lengthy court procedures.
Tax incentives are offered to TAMCO and financial
institutions that sell NPL assets. The successful
operation of the TFASC and TAMCO will expedite
the disposal and management of NPLs, lower the
NPL ratio and improve asset quality of banks.
As mentioned earlier, another financial problem
in Taiwan is the high NPL ratio of the community
financial institutions. One possible solution
is to set up a quasi-Resolution Trust Corporation
(RTC) mechanism. The Statute for the Establishment
and Management of the Financial Restructuring
Fund was enacted on June 26, 2001. The Statute
provides for the establishment of a Financial
Restructuring Fund in the amount of NT$140 billion
(or US$4.1 billion). Of the total amount of the
Fund, NT$120 billion will come from collection
of the existing 2% gross business receipt tax
on financial institutions over the next four years,
and the remaining NT$20 billion will come from
the proceeds of increased deposit--insurance premiums
over the next ten years. The Fund will purchase
the bad assets of troubled financial institutions.
In September 2001, the government made use of
part of the Fund to restructure and liquidate
NPL assets of 36 community financial institutions.
II. Problems and Difficulties encountered
by AMCs
Taiwan's first AMC was established in last May
and open its doors for business in early November
2001. Its operations have encountered some problems,
including the shortage of capital, reluctance
of banks to sell NPLs to the AMC, and difficulties
in fixing NPL pricing. A brief explanation follows.
First of all, the capital of the AMC is only
half a billion US dollars, compared with the huge
amount of NPLs totaling US$27 billion. Due to
the shortage of funds, the capacity of the AMC
to dispose of NPLs is severely constrained. To
overcome the problems, the AMC is contemplating
engaging in the trust business at the initial
stage, to minimize the use of capital. In this
regard, it may be necessary for the government
and the central bank to consider providing additional
funding to the AMC.
Secondly, many banks are reluctant to sell NPLs
to the AMC because the losses resulting from selling
NPLs would be realized immediately. This would
reduce the banks' profit and adversely affect
their achievement of annual financial targets.
Notwithstanding this consideration, the government
authorities should stand firm in advising banks
to dispose of their NPLs and reduce their NPL
ratios over a period of time, say, 5 years.
Thirdly, with regard to the NPL pricing, it
is understandable that banks want to sell their
NPLs at higher prices, whereas the AMC would like
to buy NPLs at prices as low as possible. There
is an apparent conflict of interest between the
two sides, and it is difficult, if not impossible,
to reach a compromise. In this regard, it is noteworthy
that the government has taken the initiative in
setting up an impartial third party, called the
Taiwan Financial Asset Service Corporation, to
evaluate the prices of NPLs. Nevertheless, due
to the complexity and the nature of this issue,
whether the Corporation can play an effective
role in this regard remains to be seen.
III. Pros and Cons of Government Involvement
in NPL Resolutions
NPL resolution is a difficult task that requires
cooperation and collective efforts of the government
and the commercial banks. There are questions
about what the government can do and what the
government should do in NPL management. Some argue
that banking is a high risk industry--commercial
banks themselves should bear all the risks arising
from their operations and must provide adequate
provisions for possible loan losses. It is hard
to justify the use of tax-payers' money for the
clean-up of NPLs. Also, since the primary responsibility
of the Central Bank is to achieve and maintain
price stability, its balance sheet should not
include a large amount of NPLs of the banking
system.
On the other hand, some analysts say that delays
in addressing the NPL problem may lead to a financial
crisis. Past experience shows that a crisis could
have a devastating impact on the real economy.
The crisis-hit economy would go into recession
and banks would be saddled with huge NPLs. Unfortunately,
many banks have no adequate loan loss provisions
to deal with NPLs. Under this circumstance, the
government is in a better position to establish
mechanisms to resolve the problem of NPLs of ailing
financial institutions.
There
is no doubt that the public sector can play an
important role in the speedy disposition of NPLs.
Government intervention should contain the cost
of bank recapitalization and also reduce the cost
to the taxpayer. Furthermore, the government has
to strengthen the regulatory structure and provide
the legal framework for NPL resolutions. Setting
up AMCs and an RTC is not enough. They will need
adequate funding, government support, policy guidance
and necessary actions. As the lender of last resort,
the Central Bank of China is expected to provide
short-term financing to commercial banks and AMCs
to deal with NPLs as requested.
IV. Concluding Remarks
Proper management and speedy disposition of
NPLs is one of the most critical tasks of banking
reforms today. The government could play an indispensable
role and provide invaluable assistance to the
banks to effectively reduce NPLs. These include
a supportive legal environment, a sound financial
regulatory framework, provision of operational
guidance and advice, tax incentives, appropriate
asset valuation policy, financial assistance,
and establishment of AMCs and RTC. The main purpose
of active involvement by the government is to
remove NPLs from the banking system quickly so
that the banks can resume their normal functions.
In conclusion, I would like to thank the Organizing
Committee of the Second NPL International Forum
for this opportunity to brief you on Taiwan's
experience in government involvement in NPL resolutions.
I would also like to express my sincere gratitude
to you all for your patience in listening to my
report.
*Speech
delivered at the 2001 Non-Performing Loan International
Forum, Beijing, China, November 2, 2001.
**Senior Vice President and Chief Economist, The
International Commercial Bank of China, Taipei,
Taiwan,Republic of China.
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