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Taiwan cleans up
quasi-banks
By Matthew Smith
TAIPEI - August 10, 2001, probably started out
like a normal Friday for the managers of the credit
department at the Taiwan Provincial Farmers'
Association. But like their counterparts in 35 other
small rural credit institutions across Taiwan, they soon
got a rather rude education.
In a stunning and
unprecedented move, a task force of regulators from the
Ministry of Finance (MOF), the Central Bank of China,
and the Central Deposit Insurance Corp (CDIC), as well
as officials from several government-controlled banks,
swept into the ill-run credit institutions and seized
their books. While it would take three months to dig
through the murky financial dealings of these tiny
quasi-banks, it was obvious from the start that they
were financially bankrupt and that management control
had to be transferred elsewhere.
It was a
courageous move, and a crucial step in the difficult and
pressing task of tackling Taiwan's serious
non-performing loan (NPL) issue. The revised Banking Law
passed in 2000 gave regulators the power to take over
illiquid cooperatives, but the fact that they actually
implemented the law shows that they are serious about
reform, at least in regards to the cooperatives. Of
course, financial reform is not the only game at stake.
With roots in an asset bubble of the late 1980s
and abominable regulatory policy during the 1990s, the
problem has gradually become glaringly obvious in recent
years. The official ratio of NPLs to total outstanding
loans jumped from 3.7 percent in 1997 to 7.5 percent as
of June this year. But that figure should be taken with
a grain of salt because of the government's narrow
definition of a non-performing loan. Conservative
private estimates hover at about 15 percent, or NT$2.1
trillion (US$60 billion), and some analysts suggest the
real ratio could be higher than 20 percent.
The
majority of NPLs in terms of value (or, more accurately,
lack thereof) are carried by the nation's large,
state-controlled commercial banks. But the credit
cooperatives are the worst apples in what is generally a
very bad batch. These institutions carry an official
estimated average NPL ratio of 20 percent, and banking
experts say the real rate could be as high as 40
percent. But the simple truth is that because of a long
history of opaque bookkeeping standards, corrupt lending
practices, and wink-and-nudge regulatory policy, nobody
has a handle on exactly how bad the situation is.
The local credit institution system was
established in the 1960s by the former Kuomintang (KMT)
dictatorship. Defined loosely, the term "grassroots
financial institution" applies to rural credit
cooperatives, as well as the credit departments of
parochial farmers' and fishermen's associations.
Although they are government-owned institutions, in
theory they should operate in a manner similar to that
of cooperative banks the United States, and should act
as a source of funding for their members. In theory.
However, US institutions are not often used by
an authoritarian political party to bolster its popular
support by channeling funds to local leaders, who then
line their pockets with some of the money and spend the
rest buying votes. This is precisely what has happened
in Taiwan, where the KMT traditionally used the
grassroots institutions to maintain its strength in
rural areas, and continues to do so with greater urgency
now that its power has diminished.
Which perhaps
explains the zeal with which the current Democratic
Progressive Party (DPP)-led administration is cracking
down on the grassroots cooperatives. Since the initial
raid, some 200 newly unemployed managers have been
indicted for fraud, and eight or more other institutions
have been taken over. Additionally, the MOF announced a
tough new regulatory regime last month. Institutions
with NPL rates of higher than 10 percent are no longer
allowed to take deposits from non-members of the related
association, offer deposit interest rates higher than
those of the state-owned Taiwan Cooperative Bank, or
grant loans to their own board members - a particularly
grueling punishment, given that board members have
generally felt no particular urge to pay these loans
back.
The new regulations are even tougher for
worse-managed institutions. Cooperatives carrying NPL
rates of between 15 and 25 percent are banned from
extending new loans of more than NT$5 million
(US$143,000), while those with NPL ratios higher than 25
percent are no longer allowed to establish new branches
or extend old loans. Implementing financial reform may
be difficult and controversial, but clearly the DPP
administration relishes this part of the task.
Surprise, surprise: KMT politicians, who
maintain a grip on power thanks in part to their party's
use of the cooperative system as a vote-buying
mechanism, are not happy. They say regulators have been
too extreme in implementing the crackdown and that the
punitive policy for institutions with sky-high NPL
assets will strangle the cooperatives' business
development. Their cause is bolstered by the
heartstring-tugging assertion that transferring control
of the institutions to professional bankers - or, less
probably, simply closing them down - will leave millions
of farmers and fishermen high and dry, without any
source of funding.
Perhaps this is true. After
shelling out more than NT$80 billion to recapitalize the
36 institutions it took over last year, the MOF
transferred control of the cooperatives to several
government-owned banks, which are already saddled with
high NPLs and are reluctant to extend loans to Taiwan's
fading agriculture and fishing sectors. One can presume
that the sight of the former cooperative managers being
hauled off to jail is no encouragement for them to
extend further loans to these twilight industries. Yet
the problem is genuine, given that workers in these
sectors have few skills to offer new-economy employers.
Taiwan's unemployment rate stood at a record 5.35
percent as of August.
Officials at the Council
of Agriculture (COA), in a bid to broaden their
jurisdiction into banking, have suggested that a body be
established under the COA to manage the cooperatives.
But there are fundamental questions about allowing the
institutions to continue to exist as a social welfare
mechanism. The CDIC is charged with bailing out
depositors when the cooperatives collapse, and the
government has removed its original NT$1 million limit
on deposit insurance protection - a move widely
criticized but defended by the government as necessary
to avoid a systemwide run on deposits.
Thus,
these institutions are very much a part of the financial
system, and the NPLs they carry have "seriously damaged
the country's financial base", said Premier Yu Shyi-kun,
who told lawmakers during a legislative
question-and-answer session that the institutions
continue to lose NT$100 million every three days.
Subsidies to the agricultural and fishing sectors are
common in many countries, and are sorely needed in
Taiwan - but these subsidies should not be allowed to
drag down the financial system.
The credit
cooperative story took a bizarre turn when former
president Lee Teng-hui warned the administration that it
risks losing power by reforming the rural cooperative
system. Lee, who was KMT chairman during his presidency,
is no friend of the KMT today. He quit the party last
year to set up his pro-independence political party, the
Taiwan Solidarity Union, which currently accounts for 6
percent of legislative seats - and which generally
supports the DPP. While it looks like a rift between the
Lee and President Chen Shui-bian, some pundits argue
that the criticism was part of an overall strategy of
stealing the KMT's political thunder in regards to
Taiwan's 1.6 million farmers.
Despite Lee's
public admonishment, the much-needed reforms are likely
to continue. Removing one of the KMT's key illicit
sources of political power is necessary if Taiwan's
raucous democracy is to mature, and the DPP most
certainly has its eyes on the 2004 presidential
election. In a scathing attack on critics of financial
reform, Chen recently charged them with cowardice,
egotism, and selfishness. He also added - with more than
one meaning, perhaps - that despite the pain inflicted
by the crackdown on the cooperatives, "things that need
to be done must be done".
Politics aside, the
administration deserves praise and encouragement for its
efforts to reform the cooperative system. Taiwan's
financial sector must be developed into a modern, mature
system so that it can again play its proper role and
provide stimulus for economic growth. Removing control
from the corrupt managers of the island's grassroots
credit institutions is a good way to start.
(©2002 Asia Times Online Co, Ltd. All rights
reserved. Please contact content@atimes.com
for information on our sales and syndication policies.)
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