RISE IN BANK LENDING, BUT SHORT-TERM

12:01 PM Jan 12, 1996

RISE IN BANK LENDING, BUT SHORT-TERM

Geneva 11 Jan (Chakravarthi Raghavan) -- Private bank lending to the developing world and east Europeans increased by $43.7 billion or six percent in the first half of 1995 over the second half of 1994, according to the half-yearly report by the Bank of International Settlements (BIS) in Basle.

Most of the lending, as has been the trend since beginning of 1990s, is for maturity of a year or less -- reflecting short-term trade financing and increasing reliance on local banking systems (inter-bank operations) to channel foreign funds.

The greater dependence on short-term capital, BIS comments, has entailed a more frequent reassessment of existing commitments by creditor banks, imposing greater discipline on borrowing countries, but brings with it new risks of financial instability in the countries concerned.

The pace of lending accelerated in Asia, slightly fell in Latin America (a small $2.3 billion increase in short-term lending being offset by non-renewal of maturing loans) and with some evidence of recovery in lending to eastern European entities, the BIS says.

The BIS report data covers lending by banks in the reporting countries (the Group of 10 plus Austria, Denmark, Finland, Ireland, Luxembourg, Norway and Spain) to the "outside-area countries" -- in Latin America, Africa, Asia and eastern Europe and the small number of developed countries (including Portugal, Greece and Turkey) not in the reporting area.

The total outstanding loans to all developing countries (including banks, public sector and non-bank private sector) stood at $574.622 billion, of which $336.769 billion were loans with maturity of one year or less (short-term), $33.879 billion of 1-2 years maturity, $167.783 billion of over 2-year maturity, and $37,191 billion unallocated.

Region-wise (with figures in brackets giving end 1994 data, and in billions of US dollars), Asia accounted for 280.34 (241.249), Latin America 204.116 (205.667), Africa 37.267 (37.121) and eastern Europe 91.872 (82.416).

Of the total claims on developing countries, $28.353 billion represents inter-bank loans by the reporting banks to branches of banks in the developing world but with headquarters outside, and BIS cautions some double-counting may be involved. Thus an Europe-based bank lending to the branch of an US bank in a Latin American country, which the branch bank then lends out in non-local currency to a local bank or a non-bank entity, could turn up in the reporting data of both the European and the US banks.

Of the increase in outstanding claims of BIS reporting banks on outside-area countries, the strong growth of claims on Asia contrasted with a slight contraction in exposure to Latin America. The Asian borrowers as a whole thus became the most important group of outside-area debtors ($280.3 billion), ahead of Latin American entities ($204.1 billion).

Whether or not the Mexican peso crisis of December 1994 has led to a wholesale reorientation of bank lending away from Latin America, "there is definite evidence of greater lender selectivity in the granting of new loans", BIS says.

Similar considerations may also explain why a few well-performing eastern European countries have been able to regain access to private capital markets.

The rise in share of lending for a year or less which has risen considerably in recent years, the BIS says, reflects growth of trade financing (primarily short-term), increased reliance on local banking systems to channel foreign funds and continuing caution on the part of creditor banks.

Since beginning of 1990s, short-term funds have been responsible for virtually all of increase in loans of these banks to the developing region and east Europe. Long-term claims show only a modest increase.

This recourse to short-term interbank borrowing for channelling new funds to domestic borrowers or neighbouring economies is particularly striking in Asia -- which accounts for practically the whole of the increase in claims on the developing world since end of 1990.

Even in Latin America, the BIS data show, some redistribution of declining exposure of banks in favour of the short-term category -- despite the large amounts involved in debt rescheduling agreements. This last should have resulted in a lengthening of actual debt profile of countries, but recorded figures do not show this.

The BIS suggests that consolidation of overdue principal and interest has resulted in a shift away from the short-term category, but the valuation of existing long-term debt at a discount and second market sales have reduced the importance of long-term category. European banks appear to have been the largest suppliers of funds, 53% of the total, to non-reporting countries. These were followed by Japanese banks with 20% and North American Banks with 13%. Within Europe, German banks with 17% have been most active.

The subdued lending by North American banks is a departure from an earlier era expansionary trend. US banks sharply reduced their credit lines to Latin American borrowers in first half of 1995. UK banks too did the same.

The two together accounted for more than the overall decline in total outstanding claims on the region, primarily due to non-renewal of short-term lines to Mexican private entities.

Japanese banks have been most active in channelling funds to the Asian economies, with a large proportion of their overall lending to the region used to consolidate their predominant position in Thailand -- by far the major Japanese bank outlet in Asia after Hong Kong and Singapore.

In Asia, two-thirds of the new loans were taken up by the local banking system, and was primarily short-term interbank funds, pushing the share of short-term funds to overall loans to a 64% in mid-1995.

At the same time share of loans to public sector entities continued the downward trend, while that to non-financial private entities remained more or less stable.

The high pace of lending to the Asian banking sector is due both to cyclical and structural factors. With strong economic growth, a number of countries in the region have tightened monetary conditions -- increasing the differential between local and foreign interest rates, thus sucking in substantial interbank funds.

The financial market liberalisation and development of regional banking centres (in Taiwan and Thailand) have also generated demand for additional funds from local financial institutions.

While there was a broadly spread increase in loans to Asian borrowing countries, India was the main exception where government restrictions on foreign borrowing might have been responsible for the decline from a $15 billion in end of 1994 to $14.8 billion at end of 1995. The percentage of short-term funds also fell from a 48.2 percent to 47.1 percent.

South Korea was again the most active borrower in Asia ($13.8 billion), followed by Thailand ($9 billion), Indonesia ($4.7 billion) and Taiwan ($4.1 billion).

South Korea and Thailand particularly have had rapid increases in their liabilities to the reporting banks in the recent past and are currently the two largest debtors to banks among Asian developing countries. The two are well ahead of China and Indonesia.

In South Korea strong local demand for credit and lower interest rates on foreign currency funds than on domestic deposits have encouraged local banks to seek external financing. Expansion in overseas operations of Korean companies have also contributed to increasing the foreign currency financing.

The total South Korean debt to banks end of June 1995 stood at $71.4 billion, compared to $56.6 billion end of 1994 and $48.1 billion end of June 1994.

The rise in claims on Thailand has been steadily rising in recent years, with Thailand now the third largest bank debtor in the developing world -- behind only South Korea and Mexico.

While the share of borrowing through the local banking system has traditionally been lower in Thailand than in South Korea, interbank funding has grown in importance. This has resulted in a sharp rise in the proportion of the exporting banks' outstanding claims on banking entities in thailand during first half of 1995 -- from 32% to 37%.

Foreign banks in Thailand, BIS comments, have pursued "aggressive short-term foreign currency lending" through the Bangkok International Banking Facility and this has been the principal source of financing of Thailand's current account deficit in the first half of 1995.

In Latin America, Mexico with a $6.2 billion decline and Venezuela with a $1.7 billion decline more than accounted for the $4.2 billion fall in total claims on Latin America in the first half of 1995.

A cut in short-term interbank lines, especially from the US banks, was largely responsible for the reduction in Mexico. But the impact of this on maturity distribution of claims on Mexico was mitigated by the increase in long-term loans falling due over the next 12 months. As a result share of less than a year maturity loans in Mexico fell only 1.9 percentage points below the peak of 51.3% reached end of 1994.

Weak domestic economic and financial conditions led to a further retrenchment by reporting banks visavis Venezuela.

There were however significant increases in loans to Argentina ($1.7 billion), to Brazil ($1.6 billion) and Peru ($ 1.5 billion). In all three cases the new lending was along with a marked shortening of the maturity profile of outstanding loans.

In Brazil, this reflected the predominance of short-term inter-bank credit -- financial institutions took advantage of high interest rate differential between domestic and international markets.

In Argentina's case the shortening of the maturity profile was due to the maturing of longer-term loans and conceals the impact of foreign banks' participation in a large government bond issue early in 1995.

In the Middle East, the recovery in oil prices in the early months of 1995, appears to have contributed to easing the debt repayments problem of the region. A reduction in the debt owed to banks by Saudi Arabia and Kuwait was offset by increase in claims on Iran, Qatar and the UAE.

The decline in the case of Saudi Arabia reflects the repayment of the last tranche of the $4.5 billion syndicated loan taken by that country after the Gulf war. In the case of Kuwait it reflected financial restructuring and weak economic growth. In Iran the one billion increase in bank claims on that country appears to reflect deferral of interest payments falling due in 1994.

There was also a fall of $1.1 billion in claims on Algeria, following its agreement in May with the banks for rescheduling its debts.

In East Europe, Russia and the Czech republic accounted for half of the increase of $3 billion. Hungary's active refinancing strategy on the bonds market meant funding from the banks declined.