The Taiwan government has vowed to release new rules in three months for the setting up of asset management companies (AMCs) in a bid to clean up the banking sector's mounting bad debt problem.

Foreign companies will be "welcome" to set up AMCs, says Vice Finance Minister Yen ching-chang, adding that it will be an "absolutely profitable" business. The initial capital required is estimated to be between NT$20 billion and NT$30 billion.

Yen says AMCs will not be restricted to the restructuring of bad debts in the banking sector, with managing bank assets also a possibility for AMC operators.

According to Taiwan's central bank, overdue loans held by domestic banks reached NT$704.2 billion as of 30 June, up NT$15.6 billion from the previous quarter. The figure excludes the NT$82.6 billion in bad loans written off in the first six months.

Government lead

Finance Minister Shea Jia-dong first outlined the government's plan to tackle the debt problem last week, saying a resolution trust corporation (RTC), modeled on the US Resolution Trust Corp, could be set up by the government with a funding of NT$90 billion to take over the worse debt. But his deputy said yesterday the name RTC in Chinese could "mislead" the public thinking the country is facing a severe financial problem, and decided to rename it AMC.

The government says some foreign institutions have already expressed interest in setting up AMCs, but reports say that the foreigners are only interested in collateralized debts.

Under the new plan, domestic banks also will be allowed to invest in AMCs to move their bad loans off the balance sheet as long as it does not affect their capital adequacy ratio. In the government's mind, the capital injected into AMCs by a bank could be used to buy bad loans off itself. This way, Yen says, the bank can have its capital back and a lower bad debt ratio.

The danger of that kind of approach, according to Christopher Botsford, a director of Asia Debt Management in Hong Kong, is that it could be turned into a balance sheet exercise without improving the situation. Botsford says the country's non-performing loan ratio of 5.5% is "tiny" compared to some other countries in the region.

Taiwan has vowed to clean up bad loan ratios before. The former Kuomintang government last year spoke of reducing the banks' non-performing loan ratio to 2.5% by June 2002. But critics have argued that deeds by the old and new government have achieved the contrary.

The banks under the new DPP (Democratic Progress Party) government are as reliable as they were under the old Kuomintang government in propping up the stock market. When the new Premier Tang Fei called a meeting with bank chairmen two months ago, hinting that they should extend their credits to companies in the so-called old economies so that their share prices would not be further hit. Just last month, bosses of major old economy companies went further, openly calling for government's help to bolster their waning performance in the stock market.

According to local reports, the Cabinet is likely to ditch Shea as finance minister because of public criticisms that the government has failed to articulate coherent economic policies. Since the new government has come to power in May, the stock market has fallen by more than 20%. It has been estimated that up to 85% of share investors are retail clients.