ANALYSTS FEAR BANKS in Asia could be heading for disaster as risk management skills and tools fail to keep pace with lending growth.

Rising income levels across Asia have opened huge new markets for banks in consumer lending. At the same time, corporate lending has dropped off dramatically as corporates turn to the capital markets for new funding, according to Fitch Ratings. However, there have already been painful examples of how risk management tools are not evolving at the same pace, resulting in some severe losses.

In Korea, poor credit scoring systems resulted in massive defaults as inexperienced borrowers racked up huge debts. However, lenders did not realise until after the defaults that borrowers had acquired further credit cards and loans to pay off the existing debts. In some cases, banks discovered that their defaulting clients had up to 10 credit cards and debts of 40 times their monthly income.

The situation arose because of poor scoring and risk management practices. In Korea, credit bureaus only provided data on people who had already defaulted. As the majority of new borrowers were taking out loans for the first time, they did not appear as bad lending risks.

But Korea is not the only nation to suffer at the hands of banks’ rush into consumer lending. Cash and credit card lending has grown rapidly in Taiwan in recent years, but banks there have access to the most comprehensive credit bureau in Asia – the JCIC. This register contains extensive details of debt levels and financial circumstances. Despite this, there have also been painful losses in Taiwan. According to Fitch, Taishin Bank will book a loss for 2005 following the cost of its rush into cash cards for customers who were previously considered ineligible for bank credit.

While the rest of the region has so far avoided serious loan default issues, there are concerns. Risk management practices are lagging in India, Thailand, Indonesia and China but banks there are aggressively targeting consumer lending, Fitch said. While the lending – which is predominantly securing residential mortgage lending – is not as risky as that of Korea or Taiwan, concerns remain.

Fitch questioned whether risk management infrastructure is adequate to manage the lending charge effectively and said banks must implement stronger credit approval systems. Regulators, Fitch added, must maintain a hard prudential line and promote the development of consumer credit bureaus.