August 14, 2000

Thanong Khanthong reviews the two- year second anniversary of the establishment of the August 14 Banking Restructuring Programme.

Two years after the August 14 Banking Restructuring Programme was put into place, the Thai banking system is still in a shambles.

The level of non-performing loans remains critically high. The economy continues to face a credit squeeze. Corporate debt restructuring is not moving as fast as it needs to. And the banks are still beset with the old problem of recapitalisation.

Is the August 14 Banking Restructuring Programme a failure? Most people would tend to say yes. But to be fair, the programme is simply part of the government's attempt to bail out the banks suffering from systemic failure. It is not comprehensive in scope. Nor is it a quick fix.

The Thai financial system faced a complete meltdown in 1997-1998 after the financial bubble burst. At the peak of the crisis, 68 per cent of total loans in the financial system were NPLs. The banking system alone saw its NPLs peak at Bt2.4 trillion out of total loans of Bt5 trillion. The bad assets of the 56 now defunct finance companies totalling Bt800 billion had to be liquidated.

The depth of the banking crisis was so severe that it almost dragged the whole economy down the tube.

When Tarrin Nimmanahaeminda, took over the job as finance minister in December 1997, he realised that he had a mammoth task ahead in rescuing the banks. But his first priority was to stabilise the plummeting currency, which hit Bt56 to the US dollar in late January 1998.

What would be the best or most cost-effective policy choice then? Broadly speaking, there were three models of banking reform Tarrin could have followed.

The French model, which involved nationalising all the banks and re-privatising them once the economy had improved sufficiently. He could have opted for the Mexican model, in which all the local banks were put up for sale to foreigners. Or he could take the middle path with the Chilean model, in which the government would nationalise the bad debts but with a condition that the banks must buy back the assets later on.

Tarrin decided against any of these models. Instead he chose to go for a Thai style of banking reform, a mixture of different remedies.

Before Tarrin took office, the previous Chavalit government had formed the Financial Sector Restructuring Authority to preside over sweeping banking reforms. A "good bank" would be set up to manage the performing assets of the banks, while a "bad bank" would buy the bad assets.

The idea sounded good on paper but it never came to fruition. Instead of being a banking reform agency the FRA turned out to be a liquidator. The "good bank", named the Radanasin Bank, was later sold off to the United Overseas Bank of Singapore, while the Asset Management Corporation (AMC) did not have the cash to participate in the buyout of the bad debts on any grand scale. There were fears of a moral hazard too, in that the banks might have tried to dump all their bad debts onto the government if the AMC turned out to be the only buyer.

In the end, Tarrin went for a market-oriented, three-pronged approach in tackling the banking crisis. First, he closed down the nonviable finance companies and banks and had their assets auctioned off. The FRA liquidated the Bt800 billion assets of the 56 defunct finance companies.

Second, he ordered weak finance companies and banks into forced mergers. Some (Radanasin and Nakornthon Bank) have already been privatised; others (Bangkok Metropolitan Bank, Siam City Bank, BankThai) are awaiting privatisation.

Third, Tarrin set up a Bt300 billion Banking Restructuring Programme on August 14, 1998 to help the remaining private banks and finance companies to recapitalise. Tough conditions - management shake-ups for instance - were carried out in exchange for government financial assistance. official money.

All these measures were implemented in different stages during 1998 in reaction to the deterioration of the financial situation both at home and abroad. Tarrin held that any private bank capable of strong enough to raising capital on the international financial markets themselves should do so.

the international financial markets Only Thai Farmers Bank and Bangkok Bank were successful in raising capital through global offerings in the first half of 1998. The rest thought their days were numbered.

By August, the Russian economy was in faced a financial crisis. Hedge funds were in bad shape and global financial markets were teetering on the edge of meltdown, forcing the US government to pump liquidity into the system to prevent a disastrous credit crunch. Consequently, Thai banks and companies faced a complete shutout from the international financial markets.

This led Tarrin to create the August 14 Banking Restructuring Programme as the last resort for Thai banks to raise capital.

Most critics, with the benefit of hindsight, are now quick to point out that Tarrin, given his political clout and broad-based popular support at that time, was not decisive enough in tackling the banking crisis. Had he taken a more forceful approachrelied reliedon a strong-handed approach he could have cleaned up the banking system once and for all.

For instance, Siam Commercial Bank and Thai Military Bank should have been ordered to merge, had their bad assets liquidated and been recapitalised with the help of government cash. official money.Bangkok Bank and Bank of Ayudhya should also have been forced to merge and then tie up with a strategic partner.

But this was never on the agenda happen due to all the political, cultural, social and personal constraints endemic in Thailand. These big banks, which struggled to protect their shareholders and existing managements, would weigh down on the economy afterwards. At the same time, the nationalised banks quickly became lame ducks, accounting for more than half of the problem loans in the financial system.

The cost of bailing out the financial system has kept rising. It may now climb to Bt2 trillion, or 35-40 per cent of GDP.

Tarrin's absorption with the banking system and his failure to clean it up properly has led to criticism that he spent too much money propping up banks at the expense of the real sector.

Much of the criticism accused him of focusing too much on the capital side of the banks, and not enough on the assets aspect. For instance, Krung Thai Bank should have been converted into an asset management company rather than remain a bank because it was no longer viable.

It is no use to keep injecting capital into banks when their non-performing assets are not restructured quickly enough. Adding to the problem was Against, was the fact that it was not until April 1999 that the government passed the bankruptcy and foreclosure law, which is modelled on the Chapter 11 law in the US. Also, the Thai regulatory system was not geared to cope with asset sales, asset liquidations and asset transfers being carried out on such a grand scale.

Tarrin still insists that his banking reform programme has worked, albeit not to everybody's satisfaction. Banks have raised their loan loss provisioning to Bt800 billion from Bt200 billion during the crisis. The level of NPLs has also fallen from Bt2.4 trillion to Bt1.6 trillion.

But there is still a long haul aheadway to go for Thailand's banking system. Some Bt1.2 trillion to Bt1.5 trillion of the NPLs have been deemed unrestructurableunrecoverable and are thus candidates for liquidation. Private banks still need to raise a further Bt100 billion to Bt200 billion in fresh capital, while nationalised banks will need even more.