Issues Raised in Parliament

ANSWER TO PARLIAMENTARY QUESTION ON:
Loan exposure of Financial Institutions to Regional Economies

For Parliament Sitting on 19 Feb 98

Question:
To ask the Deputy Prime Minister if he will give the latest update on loans extended by local and foreign financial institutions to regional economies, especially Indonesia where a de facto moratorium on debt payment has been announced.

Answer:
As at 31 Dec 97, the 6 local banking groups had loans and investments amounting to $37.2bn¹ (16% of their total assets) in Malaysia, Indonesia, Thailand, Korea and the Philippines. This is $3.8bn or 9.3% lower than it was a month earlier.

2 Two-thirds of this exposure was in Malaysia, where Singa-pore banks have long established operations². Their exposure to Indonesia was $5.4bn, or 2.3% of their total assets.

3 The total classified loans of the 6 local banking groups to these 5 countries amounted to 5.7% ($2.0bn) of their loans to these countries. This figure is based on an assessment by the banks' auditors in mid-January, taking account of developments up to that date. It is higher than the preliminary estimate of 3.2% ($1.2bn) for Nov 97, which I provided in my previous Parliamentary answer, and follows the comprehensive and updated review of the banks' portfolios by the auditors.

4 The total classified loans of the local banks, including both local and overseas loans, was 2.6% of their total loan portfolios (2.0% for Nov 97). As a percentage of their total global assets, this was 2.3% (1.7% for Nov 97). These figures remain well within comfortable limits.

5 The local banks, in consultation with the MAS, have decided to set aside substantial provisions to cater to the potential risks arising from their exposure to the regional economies. They have each made full specific provisions for their classified loans, with the actual provisions depending on whether the loans are classified as sub-standard, doubtful or bad³. In addition, the banks have also made general provisions on the performing loans in their regional portfolios, over and above their normal general provisions. These exceptional general provisions are of a pre-cautionary nature, and may not eventually be used. They will provide a buffer against a possible further deterioration in the quality of their regional loans.

6 In total the 6 banking groups will set aside $1.6bn from their 1997 earnings in regional specific and general provisions. If we include provisions for regional loans that they had set aside in earlier years, they will have set aside $2bn. Most of this ($1.8bn) consists of provisions on loans to non-bank customers in the region, or about 8% of such loans. The provisions vary from country to country, depending on the risks assessed by the banks in each case.

7 As a result of these exceptional provisions for regional risk, the 6 local banking groups will report significantly lower earnings in 1997 compared to 1996. In aggregate, their earnings will decline by about 30%, although some banks will decline by more than others, depending on their regional exposure.

8 However, all six banks are financially sound. They have strong capital positions, exceeding 12% of their risk-weighted assets, higher than most banks in other countries. They also sit on substantial reserves. These comprise the general provisions they have accumulated in previous years as well as substantial assets valued at cost, which remain well below current market values.

9 The MAS is satisfied with the provisions that the local banks are setting aside in 1997 as part of prudent banking practice. By recognising the potential problems early, the banks will be well prepared to cope with any further eventualities in the region.

10 The Member has also asked about foreign financial institutions. Foreign banks book their loans to the region in various branches, not only in Singapore. Their global exposure to the regional countries, as disclosed by their head offices, is more relevant than the exposure of their Singapore operations alone. Some foreign banks disclose their regional exposures in their annual reports.

¹ Of this, $35.6bn comprised loans, with $23.8bn going to non-bank customers and $11.8bn being placements with banks, including the subsidiaries and branches of the Singapore banks themselves.

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² Of their S$24.9bn exposure to Malaysia, S$3.9bn was to their branches and subsidiaries in Malaysia.

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³ The local banks make specific provisions of 10% for unsecured substandard loans, 50% for doubtful loans and 100% for bad loans.

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