FINANCIAL INSTITUTIONS (Exposure to bad loans)

Mr Chuang Shaw Peng asked the Deputy Prime Minister what is the extent to which our local financial institutions are additionally exposed to bad loans made to regional economies with rapidly falling currency and equity values, especially in October and November 1997, and whether such exposures will lead to banking crises similar to those in Thailand, Korea and Japan.

BG Lee Hsien Loong: Mr Speaker, Sir, 18% (S$41 billion) of the total global assets of the six local banking groups are in Malaysia, Indonesia, Thailand, Korea and the Philippines. About two-thirds of this is in Malaysia, where several Singapore banks have had a long-standing presence and have built up strong business relationships. Of their S$28.0 billion exposure to Malaysia, S$4.9 billion or 18% is to their branches and subsidiaries in Malaysia. 2.4% ($5.5 billion) of their total global assets is in Indonesia.

The detailed breakdown is as follows: (As at end November 1997) Country S$bn Percentage of Total Assets Malaysia 28.0 12.0% Indonesia 5.5 2.4% Thailand 4.1 1.8% Korea 2.7 1.1% Philippines 0.7 0.3% Total 41.0 17.6%

Banks grade their loans into five categories: Passed (which means normal repayment not overdue), Special Mention (which means repayment not in jeopardy but evidence of potential weakness in the borrower's creditworthiness), Substandard (which means repayments are overdue or may be in jeopardy), Doubtful (which means full liquidation of outstanding debts appears questionable and there is likely to be some loss) and, finally, Loss (where the outstanding debts are regarded as uncollectible). So Passed, Special Mention, Substandard, Doubtful and Loss. If they are graded Substandard, Doubtful and Loss, then they are considered as Classified loans.

As of end-November 1997, classified loans to Malaysia, Indonesia, Thailand, Korea and the Philippines amounted to 3.2% (S$1.2 billion) of loans to these countries by the local banks. This was 0.5% of their total global assets.

The total classified loans of the local banks, whether on their local or overseas loan portfolios, as a percentage of their total loans, was 2.0% as compared with 1.5% one year earlier. As a percentage of their total global assets, this was 1.7% as compared with 1.3% one year earlier.

These figures are as of end-November 1997. As the regional crisis unfolds, the percentage of classified loans will increase. The local banks have informed the MAS that they will make adequate provisions for this eventuality in line with prudent banking practice, in addition to the specific provisions which they have made on the existing classified loans. The MAS is monitoring the situation closely.

The local banks are in a strong position. They have strong capital positions exceeding 12% of their risk-weighted assets, higher than most international banks. They have also built up substantial buffers, as a result of prudent and conservative accounting practice. Many of the assets on their books are valued at historical prices, well below present market values. They have also made substantial general provisions over the years, in anticipation of precisely such an eventuality. There is no danger of their regional exposures causing a banking crisis in Singapore.

For our banks to grow, they must venture into the region. This will always involve some risk, as the current crisis shows. But it would be totally wrong to conclude from this experience that our banks and other firms should stay in Singapore and stop venturing offshore. The right approach is for them to evaluate investments carefully, diversify and manage their risk exposures, and build up reserves in good years. Then they can weather the storms which are inevitable from time to time, and be ready to benefit from their regional operations when our neighbours eventually recover, which they will.

Mr Chng Hee Kok (East Coast): Mr Speaker, Sir, the Deputy Prime Minister has given a snapshot of the banking industry. But surely some banks are more vulnerable or more exposed than others. The question I want to ask the Deputy Prime Minister is: is there one of the weaker banks that may have a more serious problem than the rest?

BG Lee Hsien Loong: The banks vary in their exposures but all of them are sound. As you are aware, we have a Committee working on disclosure standards for the individual banks. It is not for me to announce individually their results. In fact, I am not allowed by the MAS Act to do so. But it is for the banks themselves to do so and we have strongly encouraged them, even before this problem arose, to put out more information on their annual statements, balance sheets and profit and loss accounts, so that investors can make sound decisions and assessment as to what their state is. The problem is we have not put out as much as we could have done and as a result, even though the banks are sound, people fear the worst, which is not really justified.

Dr Lee Tsao Yuan (Nominated Member): The figures which the Deputy Prime Minister has mentioned really show that exposure to Indonesia and the other countries which are badly affected by the Asian currency crisis is really rather small. Is there, in his view, therefore any reason why the banking counters at our stock exchange had actually fallen so rapidly, except for yesterday?

BG Lee Hsien Loong: There are two things on which the MAS never expresses its views. One is the stock market, the other is the exchange rate.

Mr Heng Chiang Meng (Cheng San): Sir, earlier the Deputy Prime Minister had said that the banks had substantial general provisions. Is it possible for us to know what percentage of total loans would that be?

BG Lee Hsien Loong: I leave it to the banks to put out information which is necessary in due course.

Mr Leong Horn Kee: I have two questions. Firstly, I fully support the Deputy Prime Minister's point earlier that there should be more transparency in the reporting by the banks in Singapore. I want to ask whether there are measures that MAS or the Government is considering to encourage the banks to be more transparent in their announcements and more regular announcements on the state of their financial affairs.

The second question is, looking at the exposure, it seems that the biggest exposure of $28 billion is actually in Malaysia. Could more information be given on this figure?

BG Lee Hsien Loong: On the first question, as I told the House and which we have published, we already have a committee, chaired by Mrs Elizabeth Sam of OCBC, working on improving disclosure standards and raising them to developed country levels, which means like those in UK and Europe. So I expect them to complete their work within this year and I would expect that even before they complete their work, the banks will do their own internal reviews and soul-searching and identify ways in which they can put out more information to the shareholders and to the investing public.

On the second question, the $28 billion in Malaysia, as I explained, many of the Singapore banks have had a long-standing presence and strong business relationships there. Of this $28 billion, $4.9 billion is extended to their branches and subsidiaries in Malaysia. The rest are commercial loans and investments.

Mr Chng Hee Kok: Mr Speaker, Sir, the exposure or vulnerability of the banking system is dependent on the size of banks. Will the Deputy Prime Minister say that current size of our banks is large enough to weather this storm or should there be further consolidation?

BG Lee Hsien Loong: Mr Speaker, Sir, that is really a separate question which Mr Shriniwas Rai has asked about banking mergers, and I have given him an answer. I think the answer to the question will be there.

If we want to be regional players and if we want to weather possible upsets like this, then size is important. Size means you can do bigger deals; size means you can weather bigger upsets in your individual investments; size means you can have more critical mass to justify and build up expertise, analysis expertise, expertise to develop services for your customers and to be able to hold your own against other players. There is no obvious final optimum size. Even the biggest banks in the world are merging. Bank of Tokyo has merged with Mitsubishi Bank. SBC is merging with UBS in Switzerland. Our banks are many times smaller than those, and I do not think I am giving away a secret if I say that the Government has always encouraged Singapore banks to become bigger and to merge with one another in order to achieve this.