6:44 PM Jun 26, 1996


Geneva 26 Jun (Chakravarthi Raghavan) -- Overall bank lending rose at in the second half of 1995 at a rapid pace to the countries of Asia, Latin America and to east European transition economies but it was predominantly short-term, the Bank of International Settlements has reported.

European banks led the way as the major group of lenders to countries outside the reporting area, while Japanese banks reduced their overall contribution, the BIS said.

The BIS semi-annual report says the outstanding claims of BIS reporting banks (the Group of ten countries plus Austria, Denmark, Finland, Ireland, Luxembourg, Norway and Spain) on outside area countries increased by $46.8 billion during the second half of 1995 -- bringing the growth in bank lending for the year as a whole to twelve percent.

Outstanding claims of BIS reporting area banks on the developing countries as a whole stood at $607.964 billion at end of 1995 -- $213.026 billion on countries in Latin American and the Caribbean region, $36.431 billion on countries in Africa and $307.142 billion on countries in Asia.

The pace of lending to Asia moderated slightly from the record levels of the preceding six months.

This though masked a further acceleration in the lending to Thailand.

After the hiatus in the first half of 1995, following the Mexican peso crisis, lending to Latin American borrowers too recovered, suggesting a fading of the impact of the Mexican financial crisis.

However, says the BIS, the further decline, albeit smaller, recorded in outstanding claims on Mexico and the tendency to bypass local banking systems through direct credit to non-bank entities point to continuing caution on the part of lenders.

Outstanding bank claims on Mexico which stood at $64.625 billion at end of 1994, came down to $59.224 billion end June 1995, and declined further to $57.331 billion end 1995.

A striking feature of the last six months of 1995, BIS says, has been the importance of lending to the non-bank private sector -- which increased from a 38.6% of all outstanding claims on developing nations in mid-1994 to a 43.2% in mid-1995. There was also a similar increase for eastern Europe from a 10.5% in mid-1994 to a 14.9% in mid-1995. But the figures for developed countries dropped from a 44.0% in mid-1994 to 42.6% in mid-1995.

In the case of Latin America, the bypassing of the local banking systems to channel foreign banking funds into the domestic economies, BIS says, can be largely explained by the difficulties experienced by local banks.

In Asia, a similar development represented a major departure from the earlier pattern, but it is too early to say whether this is a new trend of a response to the circumvention of temporary restrictive measures imposed on domestic banking channels to stem short-term capital flows.

The maturity profile of international banking debt in the developing countries, the BIS report says, has tended to stabilise over the last three years. Earlier in the decade there had been a market concentration at the shorter end of the spectrum.

However, the share of the short-term component remains predominant, and is especially so in Asia where it is 64%, and has accounted for most of the new bank loans extended to developing countries in recent years.

"While partly related to the surge in imports taking place in the region this strong bias in favour of short-term banking funds appears even more acute when the limited use of other financing channels in these countries is taken into account.

"This in turn explains the efforts made by national authorities to reduce dependence on volatile short-term capital in the wake of the Mexican crisis," says the BIS, adding, to be effective, however, "restrictive measures need to be part of broader economic and financial market reforms."

New bank lending to Asian countries showed a slight moderation -- from a record $33.8 billion in the first half of 1995 to $31.6 billion in the second half.

But this slowdown was more than accounted for by a cutback in credit lines to Taiwan (- $2.6 billion) and more modest growth in South Korea -- $6.9 billion in second half of 1995 compared to a record $13.9 billion in the preceding half.

External political developments were responsible for the pull-back of reporting banks in the case of Taiwan, while in the case of South korea it was due to weakening domestic demand and a related decline in interest rates.

Measures to restrict capital inflows also continued to curb lending to India and Malaysia.

However, new lending to Thailand gathered further momentum, reaching $11.2 billion.

Thailand now ranks second in the developing world in terms of bank debt -- with a total of $62.994 billion -- with South Korea having a higher overall bank debt of $77.392 billion. Among the others with large bank debts are: Argentina $39.181 billion, Brazil $57.391 billion, Mexico $57.331 billion, Chile $13.616 billion, Colombia $10.94 billion, China $48.399 billion, Indonesia $44.843 billion, Malaysia $16.759 billion, India $15.446 billion, Iran $11.718 billion, Algeria $13.247 billion.

BIS says the progressive tightening of domestic credit by the Thai authorities appears to have been reflected more in some shift in financing, away from interbank lines and in favour of direct lending by reporting banks to non-bank entities, than in a genuine decline in overall credit. says that the rising new lending to Thailand.

There was also strong demand for international banking funds from entities in China ($6.2 billion) and Indonesia ($4.8 billion).

The measures introduced by Indonesian authorities to curb inflows through financial intermediaries and dampen credit expansion appear to have failed to reduce short-term borrowing from reporting banks, as the bulk of international bank lending was granted directly to the Indonesian non-bank sector.

In the case of China, adds BIS, the "fresh" funds may have included some reimport of capital transferred to Hong Kong in order to benefit from foreign investment incentives, as well as financing of new local affiliates by foreign banks. All of these were in the short-term area.

But the strong rise in direct lending by foreign banks to non-bank private entities, outside the scope of the Chinese credit plan, suggests the effectiveness of domestic credit restraints may be reaching its limits.

More generally, BIS says, Asian countries appear to have met with varied success in their attempts to reduce dependence on short-term banking flows in the second half of last year.

At end of 1995, banking debt with a maturity of less than a year accounted for 87% the total in Taiwan, 70% each in Korea and Thailand, and was approaching the 50% mark in India, China and Malaysia.

Restrictions imposed in many cases on domestic banking systems to contain short-term capital inflows appear to have led to a shift in international bank lending from bank to non-bank customers, thus complicating monetary policy and hindering efforts to dampen credit expansion.

The large proportion of short-term banking debt of Asian countries should also be seen in relation to the progressive liberalisation of financial systems.

The narrowness of local equity and fixed income markets has so far given greater importance to banking systems in providing opportunities for foreign intermediaries and in promoting the development of a regional financial network.

In Thailand, for e.g., close to 60% of BIS reporting banks' claims on local banking system at end-1995, were visavis local affiliates of foreign banks. These affiliates have made a major contribution to the strong expansion of the Bangkok International Banking Facility since its opening in early 1993.

Also rapid growth and trade liberalisation in Asia have stimulated imports which are generally associated with short-term lending to non-bank entities.

The share of the non-banking sector in the Asian region's banking debt has arisen from a 36% in 1990 to 46% at end of 1995. This cannot wholly be related to the circumvention of restrictions on local banking intermediation. It also reflects debt repayment by governments.

"By spreading the risks among a wider array of borrowing entities, lending to non-bank entities should reduce the potential for an abrupt reversal of short-term banking flows," says BIS.

The BIS cautions that both the smaller number of reporting countries and worldwide consolidation principle applied under its present half-yearly reporting system generally result in smaller total reported claims than those under the earlier quarterly system which was based on the country of location of reporting institutions - without any netting of inter-office accounts. The gap between the two widened considerably in 1995 -- with outstanding claims against Asian developing countries amounting to $307.1 billion according to the half-yearly statistics and to $368.1 billion according to quarterly statistics. This gap, at respectively $63 billion and $89.5 billion, is particularly significant for Thailand. This is explained largely by the fact of a number of reporting institutions channelling funds to other related offices, including their own head offices, via affiliates in Thailand.

In Latin America, the rebound in bank lending is primarily explained by developments in Brazil and Chile.

Brazilian borrowers absorbed more than 50% of new funds to the region - with the non-banking private sector entities accounting for the largest share of new funds - over $3 billion.

After contractions in the first half of 1995, claims on Chile rebounded sharply.

Lending to Argentina was steady at $1.6 billion -- despite negative economic growth and continued financial sector weakness. Support from official sector creditors and rapid implementation of adjustment measures in response to the Mexican crisis led to recovery of confidence of foreign creditors.

In Peru, while there was continued sizeable lending in the form of short-term credit lines, and despite a preliminary agreement on a Brady-type restructuring accord with commercial banks, the country's large current account deficit continued to make international banks cautious. In Colombia, more than half of the new lending of $0.9 billion was to the non-bank private sector.

In the Middle East, due to efforts of oil-exports to adjust their fiscal and foreign debt positions, there was a further reduction in outstanding claims. The cumulative rise of $2.5 billion in claims on Iran in the preceding 12 months reflected mostly deferral of interest payments, while stagnation in the six months of 1995 suggests renewed fulfilment of debt payment obligations. In Saudi Arabia the authorities maintained a tight fiscal policy and continued to limit their recourse to external financing.

There was a further reduction, $200 million, in banks claims on African countries -- more than entirely due to non-renewal of a large volume of maturing long-term debt by Algeria and Morocco. But new lending to other countries showed some signs of revival -- particularly so for Angola, $200 million; the Congo $400 million; and Ghana $300 million.

In Eastern Europe after two years of steady decline, outstanding claims rose for the second consecutive half-year -- $1.1 billion -- bringing the increase for the entire year to $4 billion. But if the Czech Republic, where lending was buoyant, is excluded, claims on the region fell in the second half of 1995.

There was a $9 billion rise in reporting banks outstanding claims on the group of developed countries outside the BIS reporting area -- Portugal with $2.3 billion, Turkey $1.6 billion and Greece $1.3 billion appear to have absorbed most of the new funds.

European banks were the major group of lenders to countries outside the BIS reporting area.

While Japanese banks reduced their overall lending, the apparent stagnation in current dollar claims of japanese banks conceals continued new lending when allowance is made for the statistical impact of the yen's depreciation against the dollar.

European banks have made particular inroads into Asia, overtaking Japanese banks by the end of the year as the main group of creditors to the Asian developing nations -- a 39% compared to the 37% of Japanese banks. The share of European banks lending to Asia has steadily increased over the decade -- led by French and German banking groups.

European banks which had already overtaken, as early as 1987, their North American counterparts as the main group of lenders to Latin America, have strengthened their lead in recent years. At end of 1995, they accounted for 53% of total outstanding claims of reporting banks on Latin American countries compared to 31% for North American banks.