Coping with sluggish bank lending in Asia

The year 2012 has not been good for the Asian banking industry. Credit growth is falling in most Asian countries. For instance, new lending by the four biggest Chinese state-owned banks was flat in April and May 2012. There are multiple reasons for this. The primary reason is the slowdown of real GDP growth in most Asian countries. Newly released macro data predict a slump in the economy in those countries. Due to the expectation of a weak economy, the demand for new credit is not as strong as in previous years. Weak exports to the Eurozone and the U.S. will likely cause damage to the manufacturing industry in export-oriented Asian countries and reduce their demand for bank loans. The slowdown in real GDP growth and trade growth predicts a likely surge in non-performing loans in the Asian banking industry.

Another reason for the sluggish bank lending in most Asian countries is the growth of corporate debt financing. The Wall Street Journal has reported that Asian companies have shown increased interest in debt financing compared to traditional bank loans. Dealogic database indicates that corporate debt financing in Asian countries other than Japan almost tripled in 2011 compared with four years ago. The migration from traditional bank loans to the bond market can be attributed to the increased costs of bank loans that result from a sharp increase in the banks’ own funding costs, and the increase in demand for corporate bonds as investors seek higher returns. As Asian countries continue to develop their market for alternative sources of financing, the Asian banking industry faces a strong challenge in expanding its lending.

To cope with these challenges, the Asian banking industry needs to improve its cost efficiency. Gardeber, Molyneux, and Nguyen-Linb (2011) find that local banks in Asian countries are less efficient than their foreign peers in general during the 1998-2004 period. The Asian countries need to continue the recapitalization and restructuring of their banking industry that they started after the 1997 Asian financial crisis. A better capitalized bank is better able to deal with financial shocks and Gardeber et al. (2011) show that bank ownership structure has a significant impact on bank efficiency. Williams and Nguyen (2005), Megginson (2005), and Clarke, Crivelli, and Cull (2005), among other studies, also report that private banks are more efficient than state-owned banks. However, a World Bank report by Laeven (1999) suggests that family-owned and company-owned banks are riskier than foreign banks. Hence better risk management is necessary for the Asian banking industry as bad debt ratios and non-performing loans are increasing in those countries.

On the bright side, the pullback of the European banks in past years leaves the Asian banking industry an opportunity to grow. Besides, cross-border integration and the liberalization of local capital markets will likely strengthen the Asian banking industry. Some large Asian banks are planning on acquiring smaller banks in high growth Asian countries. However, because studies (e.g., Rhoades, 1998) have shown that bank mergers do not necessarily improve cost efficiency, the impact of cross-border integration in Asian countries is still uncertain.

* The author thanks Ramon P. DeGennaro for helpful discussions.
 

Zhongdong Chen, Ph.D. Candidate, Finance Department, College of Business Administration, The University of Tennessee, Knoxville, Tennessee, USA
Email: [email protected]