By Keith B. Richburg
Washington Post Foreign Service
Monday, March 30, 1998; Page A21

BANGKOK—The causes and cures of the Asian economic meltdown vary from country to country. But most crisis-hit governments, along with their foreign backers and financial analysts, are now wrestling with a common question that holds the key to the region's recovery: how to inject more capital into cash-strapped banks.

From Seoul and Tokyo in the north to Jakarta in the south, Asian banks are sitting on hundreds of billions of dollars of bad debt. High interest rates and a regionwide drop in real estate prices are dragging down bank earnings. Some banks are merging, voluntarily or under government orders. Others are looking for foreign partners. And many, if not most, are badly in need of an infusion of cash.

The turmoil threatens to prolong Asia's struggle to regain its economic footing and will likely add hundreds of billions of dollars to the eventual bailout cost, analysts predict. Sorting out the mess also will entail sweeping structural changes in the industry that will alter the face of regional banking.

A change with long-term ramifications for the industry is that foreign banks -- American and European -- are likely to play a bigger role in the future. Some Asian banks are looking for foreign capital and foreign partners to survive. But in many cases that will mean a dramatic change in some traditional Asian banking practices: an opening of the books, a loosening of the hold of tradition-bound, tightknit families and an adherence to stricter international standards with greater outside monitoring.

The numbers are staggering.

In Thailand, where the government recently closed 56 finance companies and took over four ailing banks, analysts estimate that more than $15 billion is needed to recapitalize the banking sector. With the economy expected to contract nearly 4 percent this year, bad bank loans are predicted to peak at about 30 percent of the total number of loans.

In South Korea, where bad bank loans could reach 25 percent of total outstanding loans by next year, banks are estimated to need $34 billion to recapitalize.

In Indonesia, where the government is trying to force the consolidation of its 250 or so banks by year's end, the rupiah's dramatic plunge means that the number of bad loans is likely to rise to 70 percent, and most of that may never be recovered, analysts say.

"You talk about nonperforming loans? Nobody's paying," said James Castle, chairman of The Castle Group, a Jakarta-based business information and consulting group. The estimated cost of recapitalizing Indonesia's banks is at least $20 billion.

Malaysia, too, is believed to be in bad shape. The government hasn't gone to the outside world for help but recently had to prop up two large banks that were reeling from larger than expected losses. Official forecasts are that bad loans will hit 10 percent this year, but private estimates say the number could be as high as 25 percent. In Malaysia's favor, most of the bad loans are domestic.

The big question hanging over the region is the status and fate of Japan's banking and financial system, which is said have accumulated more than a half trillion dollars in bad debt -- twice that when insurance debt and other nonbank debt are factored in.

In addition to a slowdown at home, Japanese banks are heavily exposed in Southeast Asia, especially Indonesia. Some regional analysts talk of a "doomsday scenario" in which the Japanese financial system collapses under the weight of its bad loans, Tokyo raises capital by selling its U.S. Treasury bonds, and the booming U.S. economy suddenly slows, leading to a global economic meltdown.

Banks have several ways to raise the cash they need to recapitalize. They can issue new shares, they can look for foreign partners or new foreign owners, or they can foreclose on their bad loans and sell off the collateral properties repossessed from the debtors.

In the current climate, all three are tricky, as the Thai experience has demonstrated. At the same time, it also suggests creative solutions to the crisis which, if successful, might be copied elsewhere.

Bangkok Bank, which is tightly held by one Thai-Chinese family, has opted to issue 400 million new shares. That would raise more than $1 billion for the bank but still allow the Sophonpanich family to retain control.

But the bank is one of just two or three of Thailand's 15 that are considered financially healthy. Any share offering by an unhealthy bank might attract few takers or might be unable to raise sufficient cash.

The easiest route to fresh capital is to foreclose on bad loans, seize the assets of the debtors -- usually property that was put up as collateral on loans -- and auction off those assets to raise cash for recapitalization.

But the problem in most of the region is that foreclosure laws are inadequate and tend to heavily favor the debtor. Under existing laws in most countries, it can take banks years to foreclose on a bad loan.

The inadequacy of bankruptcy and foreclosure laws explains the state of affairs in Indonesia, where most manufacturing companies, on paper at least, are bankrupt and none is repaying dollar-denominated loans while the rupiah hovers near 8,500 per dollar.

But at the same time, few if any have closed their doors or laid off staff. "Companies never close here," Castle said. "We call them zombie companies -- they're dead, but still walking."

Thailand, among others, is starting to draft new rules to ease foreclosures and allow creditors to begin seizing assets.

Until new foreclosure procedures are enacted into law, however, most banks see courting foreign partners as the quickest way to attract capital. But even that route is difficult.

In Thailand's case -- and the situation is believed to be similar in Indonesia -- foreign banks conducting "due diligence" reviews of local banks for possible purchase still have a hard time pinning down the number and size of bad loans. Also, because of collapsed local currencies and stock markets, it is difficult to determine exactly how much a local bank is worth.

In Thailand, the Dutch banking giant ABN-AMRO has gotten around those pitfalls in buying the Bank of Asia, Thailand's 11th-largest commercial bank. Under the arrangement, ABN-AMRO will own a majority share of the bank but will adjust the price in two years based on a review by an independent auditor, once the Thai currency, the baht, settles and market conditions normalize.

But there is an even larger impediment to a massive foreign takeover of Asia's banking sector: the regionwide aversion to foreign domination.

"I think there will be some resentment," Thai Prime Minister Chuan Leekpai said in an interview this month. "But overall, the direction of the country is towards liberalization, opening up, and being a part of the global economy."

"If we want to be part of the global economy," he said, "we have to realize there is a role for foreign investors."