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Mergers of finance firms 'inevitable' to stability

 

Finance companies must be encouraged or ordered to merge now and to prevent a financial crisis, say Thanong Khanthong and Vatchara Charoonsantikul.

A WINDOW of opportunity is now opening for the Finance Ministry and the Bank of Thailand to deal with 91 finance companies which must undergo a wave of mergers and acquisitions until their number is reduced by at least two-thirds.

This is a painful process that all the finance companies must cooperate with if they want to save the nation from teetering on the brink of financial disaster. The Thai Danu Bank/Finance One merger is going to serve as a merger and acquisition model which will rewrite the landscape of the Thai financial system if the deal succeeds.

With their backs against the wall, there is nothing small finance companies can do but sell out, merge or be taken out of the market immediately. For medium-scale finance companies, they must be given full liquidity support, yet over the next six-to-nine months they must be encouraged or ordered to merge with their peers. For large finance companies, a similar policy strategy is also applicable.

Why has the Thai public in general put up with the unprofessional, poorly-managed finance companies, which need to be bailed out every single time the Thai economy enters a down cycle? In 1984, some 40 to 50 finance companies went bankrupt, leading the banking authorities to set up a life-boat scheme to bail out 25 of them.

On Monday, some of the same old troubled finance companies, which could not survive the last financial crisis, were propped up again. It is one of the craziest jokes in the world that these finance companies know full well that they will be bailed out of every downturn in the Thai business cycle because they are too big to fail, disregarding their reckless management during the bull-market cycle.

Well, this time it should be tough luck. The finance and banking authorities must take the necessary steps to peel off the D-grade or C-grade finance companies in return for liquidity support. Inevitably, some of them must go to the wall, otherwise it is going to impose a hefty cost on the system, as with the case of the failed Bangkok Bank of Commerce.

Finance companies may go bust, yet the public depositors might not lose their money. This could be an acceptable political equation. There were indications on Monday and yesterday that the Bank of Thailand has set aside provisions from its own pocket to back up all the promissory notes in the finance sector system.

This amounts to nothing but a free lunch, as the government is sending out a clear message that it will guarantee that the public will not lose a single baht by depositing their money in the finance companies, no matter how risky they are.

Is this measure necessary? Yes, it is. During this precarious time the authorities are justified in resorting to every means to prevent a financial system breakdown.

Is it fair? No, it is not. The rich people who put their money in finance companies realise that they get higher deposit rates than keeping their money in banks. They also realise that there is an element of greater risk in doing business with finance companies than with banks.

This explains why finance companies are second-class corporate citizens, a term frequently used by Pin Chakkaphak, the president of troubled Finance One.

Let it be known to the world that this is going to be the last free lunch and that Thailand is cleaning up its financial house once and for all. Unsalvageable finance companies which are saddling themselves with bad debts must take the huge write-offs. The shareholders must suffer.

The Financial Institutions Development Fund will help pick up the pieces along the way in return for their consent to go into extinction. The government's package to bail out the property market another free lunch must also simultaneously work to end the crisis in this sagging sector.

On Monday, Finance Minister Amnuay Viravan and Rerngchai Marakanond, the Bank of Thailand governor, unveiled a package to bail out the troubled finance and credit foncier sectors by requiring them to boost their capital, and demanding the finance and banking sector increase provisions for non-performing loans by Bt50 billion within two years.

They also took the unprecedented step of announcing a list of the 10 most troubled finance companies, which would be required to immediately raise more than Bt8 billion in fresh capital to cope with their financial problems. All these emperors are wearing no clothes. Other emperors are also scantily dressed. They should be lumped together into mergers and acquisitions in a big-bang shake-up of the Thai financial system.

This appears to be the only way the government, which must not forget to keep its promise to balance its budget, can restore confidence at this critical juncture. Financially-poor companies should be merged and given a banking licence as an incentive, which might be a cherishable alternative.

If the government fails in this enterprise then an evil cycle will start its disastrous motion. The sagging property sector, lubricated by easy money imported from overseas, began the cycle with its oversupply more than five or six years ago.

Then it was the turn of the stock market, which has tumbled from the 1,700 level to well below the 700 points level. Unexpectedly, the export slump last year sent the Thai economy into a tailspin, a hard landing for the first time in more than a decade.

Currency speculators, realising Thailand's weakness in its current account deficit, started to attack the baht early this year, forcing the banking authorities to keep local interest rates sky-high. Finance companies have become strapped for cash due to the prohibitive cost of funds.

The asset quality of the financial institutions has emerged as the main problem. Revaluations of asset values are taking place. Meanwhile, all the problems, which combine to form the downward cycle, remain unresolved and will worsen in a spiral effect. The last thing everybody would like to see is Thailand yield to the pressure by devaluating the baht.

In the early 1990s, Japan did not handle its financial crisis well, and it is still paying a dear price for it. Thailand cannot afford to become another Japan, if not another Mexico.

 

 

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