Parliamentary Question on Bank Exposure

Date: For Parliament Sitting on 14 Jan 98
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Question:
To ask 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.

Answer:
1 18% (S$41b) of the total global assets (S$232b) of the 6 local banking groups are in Malaysia, Indonesia, Thailand, Korea and the Philippines. About 2/3 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% ($5.5b) of their total global assets is in Indonesia.

2  The breakdown is as follows :

          (All data as at end-Nov 97)

Classified Loans
2 Banks grade their loans into 5 categories: Passed¹, Special Mention², Substandard, Doubtful, and Loss. Classified³ loans are those graded Substandard, Doubtful, and Loss.

¹ Passed loans refer to loans where normal repayment is not overdue.
² Special Mention loans are loans where repayment is not in jeopardy but there is evidence of potential weakness in the borrower's creditworthiness.
³ The definitions of these gradings are as follows:-

a)  Substandard - loans are classified substandard when their normal repayment are overdue or may be in jeopardy. Also included in this category are performing loans which are graded substandard solely because of the borrowers' weak financials. (The local banks make 10% provision for the unsecured portion of their substandard loans.)

b)  Doubtful - loans are classified doubtful when full liquidation of outstanding debts appear questionable and the accounts suggest that there will be a loss, the exact amount of which cannot be determined as yet.  (The local banks make 50% provision for their doubtful loans.)

c)  Loss - loans are classified as loss when outstanding debts are regarded as uncollectible.  (The local banks make 100% provision for their unsecured loss loans.)

3  As of end-November 97, classified loans to Malaysia, Indonesia, Thailand, Korea and the Philippines amounted to 3.2% (S$1.2b) of loans to these countries by the local banks. This was 0.5% of their total global assets.

4   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% (1.5% one year earlier). As a percentage of their total global assets, this was 1.7% (1.3% one year earlier).

5  These figures are as of end-November. 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.    

Soundness of Our Banks
6  The local banks are in a strong position. They have strong capital positions exceeding 12% of their risk-weighted assets, higher than most international banks⁴. 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.

⁴  The local banks are required to maintain shareholders funds of at least 12% of their risk-weighted assets. Most international banks are required by their respective supervisory authorities to maintain at least 8% of risk-weighted assets in capital, comprising both shareholders funds and other forms of capital such as undisclosed reserves, general loan loss reserves and subordinated term debt.

7  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.

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