The weaker economy and fallout from low oil prices spawned a rise in non-performing loans (NPLs) that dragged down profits at many Asian banks in the past year.
But it is only natural for NPLs to be rising if banks are doing their jobs right, Singapore's top central banker said yesterday.
"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," said Mr Ravi Menon, Monetary Authority of Singapore (MAS) managing director.
Delivering the opening remarks at the annual Symposium on Asian Banking and Finance, held at the MAS building, he said NPLs here have risen in the risky oil and gas (O&G) sector, but urged that NPLs be viewed in the right perspective.
"Banks are in the business of intermediating risk. When risks materialise, as they sometimes do when those who borrow get into difficulties, NPLs must rise."
The fact is that NPLs' rise is less of a concern than whether that rise is manageable, and if problem loans are being monitored closely and classified prudently, he said.
"Our banks' exposure to the O&G sector is contained. The banking system's aggregate exposure to the O&G is around 10 per cent. For local banks, this figure is lower at 6 to 7 per cent. Banks in Singapore have also made adequate provisions for their overall NPLs."
But in the medium to long term, the prospects for Asian banks are good, chiefly because the prospects for Asian economies are good. High incomes will drive demand for financial services, leading to more opportunities in banking, Mr Menon said.
He noted that Asian banks have stepped up in recent years to play a greater regional role: "Global banks will continue to play an important role in the region, especially in wholesale banking and the intermediation of US dollar flows. But the onus largely falls on Asian banks to expand financial inclusion, especially at the retail and small-business level. Asia is fertile ground for digital innovation in banking."
For example, only a third of the population is formally banked in Indonesia and Vietnam, but mobile phone penetration rates are above 100 per cent.
"Broadening access to financial services will offer Asian banks - and fintechs - the opportunity to grow their business while serving a social purpose," Mr Menon said. When Singapore assumes the Asean chairmanship next year, "financial inclusion will be a key priority".