Why Asian Banks’ Bad Debt Pile Highest Since Global Financial Crisis ?

AFP 504882110 A MAX USA NY

A bad debt is defined as a quantity that a creditor owes and most probably would not pay. Bad debt is interpreted differently based on accounting conventions, regulatory treatment and institution provisioning.

The bad debts of several banks in Asia have reached a peak since the global meltdown. The trend would aggravate as local economies confront China’s downturn and unpredictable oil & commodity rates.

The total bad loans covering 74 key listed banks in Asia, other than the banks in India and Japan touched US$ 171 billion in the last quarter of 2015. This was the maximum, since 2008. Non-performing loans (NPLs) soared 28% from the previous year, almost two times the development in 2013.

According to market experts, the slowdown in the economy of the Asian region would result in weakening of the lenders asset quality. Once banks release information on quarterly earnings, they would have to prepare write-downs that would impact profit and decrease valuations.

The central banks in Asia have reduced interest rates to ensure enough liquidity, but unpredictable economic development and sluggish exports would result in loan evasions in the short term.

According to Gene Fang, Moody’s Associate Managing Director for financial institutions group, “We expect asset quality to weaken and bad loans to increase. The key factor we see is Asia entering into more challenging phase of the credit cycle. In the recent past, we saw relatively strong growth and low interest rates, which encouraged loan growth and higher leverage. But growth has now weakened, most significantly in China, which is impacting the rest of the region.”

The Chinese economy increased by 6.9% in 2015, the slowest momentum in nearly 25 years. Bad loans reached the highest point in a decade at the end of the 4th quarter. According to Moody’s, “There would be continued asset quality pressure over the next 12-18 months.”

The fourth biggest bank in Thailand, Kasikornbak, estimates the ratio of non-performing loans to cumulative loans to increase to around 3.5% in 2016 from 2.7% in 2015.

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