recession of the last 18 months has been the deepest since records began in 1961. real gdp fell by 5. 1 % in 1998 after rising by about the same percentage in the previous year. unemployment has risen to 6. 2 %, a level unprecedented for hong kong. this was accompanied by plummeting asset prices that at their lowest had fallen by 50 % in the case of residential properties and 60 % in the case of the hang seng index. in an economy as used to prolonged economic growth and full employment as hong kong and so heavily dependent on asset values, it is not surprising that this translated into a sharp rise in bad debts for the banks. the bad debt charge for our locally incorporated banks in respect of their hong kong business more than tripled in 1998, albeit from a low base. non - performing loans ( measured by those that have been classified as substandard, doubtful and loss ) rose from around 2 % at end - 1997 to 7. 3 % at the end of last year. this is a sharp increase but it is important to put it into regional perspective. the equivalent figure for non - performing loans in thailand at present is around 46 %. the picture in indonesia is even worse. hong kong has therefore fared better in respect of credit risk than its neighbours. it has no doubt been helped in this by the solid regulatory framework in hong kong and the infrastructure of business laws that makes it relatively easy to take and realize collateral and to put defaulting borrowers into liquidation. banks are also free to carry on their business without political interference. i believe that hong kong has also benefited from its openness as a financial centre, though this can also have its drawbacks. major international banks are allowed to play a full role in our banking system, including in many cases participating as full retail banks. this has allowed cross - fertilization of talent, systems and products between the local and foreign banks. finally, another point in hong kong ’ s favour is that it had already gone through a banking crisis in the early 1980s, in which abuses such as connected lending had played a part. this provided a stimulus to major reform of the banking law and to improvement of supervisory standards, a process that has continued to this day. we should not however allow the relatively better credit performance of hong kong during the crisis to lull us into a sense of complacency. much of the blame for the rise in bad debts in hong kong can indeed be laid at the door

still not much new lending going on - in hong kong domestic lending has fallen for ten months in a row. the main priority for many banks is therefore to limit the damage from loans already on the balance sheet. to be successful in this objective requires a number of factors to be in place at both the individual bank and sector levels. in individual banks, there must be an effective system of credit monitoring and loan classification to detect problem loans at an early stage and to enable corrective action to be taken as soon as possible. as i have already indicated, the shift from relationship banking and the unwillingness of borrowers to supply sufficient information have been hindering factors in hong kong in enabling banks to pick up early warning signals. once problems have been detected, it may be sufficient in the early stages to leave the handling of these with the account officers. but when the problems are too deeprooted, there will usually be advantage in transferring problem loans to a dedicated loan recovery unit where specialist expertise attention can be devoted either to restructure the loans or to take recovery action and liquidate any collateral. this is the theory, but it is easier said that done to find loan recovery specialists when many bankers in the region have not experienced a prolonged period of economic decline. outside experts, for example from the accounting firms, can help to fill some of the gap. but it is also essential that the banks build up their own resources and provide more training to their own staff on how to deal with problem loans. at the sector level, it is necessary to have an effective insolvency regime to ensure that nonviable companies can be wound up in an equitable manner before they have the chance to build up even further losses. however, liquidation should generally be a last resort and there should be an alternative to insolvency that allows distressed, but commercially viable, companies to survive as going concerns, thus preserving employment and productive capacity. this requires a framework that encourages negotiation and compromise between distressed borrowers and their creditors. the objective should be to agree a standstill on debt payments and a moratorium on legal proceedings to provide a breathing space during which negotiations on a debt restructuring can take place. in hong kong, the association of banks has issued non - statutory guidelines for the conduct of debt workouts. these are based on the so - called london approach to workouts that was developed by the bank of england. other countries in the region have also used this as a model for dealing with corporate restructuring