It may be of interest to this audience to know that trade finance has been a particular problem area and has attracted higher than average bad debt provisions. On the face of it, this seems strange since trade finance is normally seen as being short-term, self-liquidating and secured on the underlying goods. In practice, companies found it possible to obtain trade lines from a multiplicity of banks in excess of their underlying needs. In this situation, trade finance becomes in effect part of the general working capital of the company and can be siphoned off into the kind of speculative activities I have already described. In many cases, short-term trade finance financed long-term property developments in China. What lessons can be drawn from this? Banks should obviously have a thorough knowledge of their customers’ business and of their real funding needs. Banks should know what their lending is being used for and try to ascertain the borrowers’ facilities from other banks. 3  BIS Review 53/1999  However, in situations where banks are too anxious to lend, it is all too easy for the borrower to deny information to the banks and to play the banks off against one another. In granting credit, banks thus need to undertake proper financial review of their customers based on reliable information. Particular attention needs to be paid to cash flow and the ability to service debt in stress situations as well as normal conditions.
To be successful in this objective requires a number of factors to be in place at both the individual bank and sector levels. In individual banks, there must be an effective system of credit monitoring and loan classification to detect problem loans at an early stage and to enable corrective action to be taken as soon as possible. As I have already indicated, the shift from relationship banking and the unwillingness of borrowers to supply sufficient information have been hindering factors in Hong Kong in enabling banks to pick up early warning signals. Once problems have been detected, it may be sufficient in the early stages to leave the handling of these with the account officers. But when the problems are too deeprooted, there will usually be advantage in transferring problem loans to a dedicated loan recovery unit where specialist expertise attention can be devoted either to restructure the loans or to take recovery action and liquidate any collateral. This is the theory, but it is easier said that done to find loan recovery specialists when many bankers in the region have not experienced a prolonged period of economic decline. Outside experts, for example from the accounting firms, can help to fill some of the gap. But it is also essential that the banks build up their own resources and provide more training to their own staff on how to deal with problem loans.