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The region is expected to continue registering relatively high growth rates in the medium term, about 6% on average  over the next five years, compared to the global average of 3.7%.
The region is expected to continue registering relatively high growth rates in the medium term, about 6% on average  over the next five years, compared to the global average of 3.7%.

Financial Inclusion Low in Asia

Using innovative fintech solutions, banks can mobilize untapped savings and provide access to credit for under-banked individuals and businesses

Financial Inclusion Low in Asia

The prospects for Asian banks are good chiefly because the prospects for Asian economies are good, the managing director of the Monetary Authority of Singapore, Ravi Menon, said.
At the same time, financial inclusion remains low in many parts of the region, he said on Monday at the Symposium on Asian Banking and Finance held in Singapore. The symposium is jointly organized by the Federal Reserve Bank of San Francisco and the Monetary Authority of Singapore, news outlets reported.
The region is expected to continue registering relatively high growth rates in the medium term—about 6% on average over the next five years, compared to the global average of 3.7%.
"Higher Asian incomes will drive demand for financial services, leading to more opportunities in banking. At the same time, financial inclusion remains low in many parts of Asia," said Menon.
A 2015 World Bank study found that of the two billion adults on the planet with no bank accounts, more than half were in East and South Asia, he said. Global banks will continue to play an important role in the region, especially in wholesale banking and the intermediation of US dollar flows, he said.
"But the onus largely falls on Asian banks to expand financial inclusion, especially at the retail and small business level. Using innovative fintech (financial technology) solutions, they can mobilize untapped savings and provide access to credit for under-banked individuals and businesses," said Menon.
Asia is a fertile ground for digital innovation in banking, he noted. In Indonesia and Vietnam, only around a third of the population is formally banked. Yet, their mobile phone penetration rates are above 100%—that is more than one phone per person on average, he noted.
This—coupled with a young and tech-savvy population—makes for a ripe environment for mobile banking, he said. The road to financial inclusion is neither short nor easy. But it is an important one, Menon said.
"Broadening access to financial services will offer Asian banks—and fintechs—the opportunity to grow their business while serving a social purpose," he said. Financial inclusion will be a key priority in the economic cooperation agenda when Singapore assumes the chairmanship of Asean next year, he added.
 
Rising NPLs
Rising non-performing loans must be viewed in the right perspective, he said. Banks are in the business of intermediating risk. And when risks materialize—as they sometimes do when those who borrow get into difficulties—NPLs must rise, explains Menon, edgemarkets.com reported.
“This may be odd for a regulator to say—but if NPLs did not rise at all during difficult times, then the banks are probably not lending enough or taking on sufficient risk to promote business expansion or enterprise,” he said.
A recent study conducted by MAS found the three cyclical factors that contribute to the decline in Asian bank profitability. These are weaker global economic growth, prolonged accommodative monetary policy in the advanced economies and decline asset quality.
“What is important is: Is the rise in NPLs manageable and contained? Are problem loans being monitored closely and classified prudently? Are provisions made proactively and conservatively?” asks Menon.
To be sure, NPLs have risen in many regional economies, including Singapore. NPLs here have risen amid a weakening economic environment and emerging asset quality risks in the oil and gas sector, which have been weighed down by low oil prices.
But Singapore banks have managed to contain their exposure to the O&G sector, he said. The banking system’s aggregate exposure to the O&G sector is around 10%, while local banks hover around 6-7%.
The local banks have also made sufficient provisions for their overall NPLs. The overall provisioning cover for the banking system, as a percentage of total unsecured NPLs, is above 100%, while local banks are higher at above 200%.
Fortunately, Menon said, these cyclical headwinds should pass in time for Asian banks as the growth is recovering, monetary policy is normalizing and commodity prices are stabilizing.

 

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