Big bumps ahead for banks

August 16, 1999 -- A YEAR after the launch of the Aug 14 Banking Restructuring Programme to underwrite the banking system, the market mechanism has failed to work. Banks still do not lend money, non-performing loans have climbed to 47 per cent of all loans and the banks still have some way to go to complete their recapitalisation. Is the programme a failure?

Panellists participating in The Nation-Krungthep Turakij roundtable discussion last week admitted that it was not adequate to judge the banking reform package on its merit alone since it was a part of a broader framework to stabilise the Thai economy.

At the time when the package was introduced, Thailand had already been under the International Monetary Fund's support programme for one full year. But then the economy was still going downhill and all the banks were about to go under.

''I don't think it is appropriate to simply look at the Aug 14 package alone because the broader question is how Thailand has fared under the IMF programme over the past two years. It is more relevant to assess the IMF programme, which has broader implications,'' said Dr Pisit Lee-ahtam, the deputy finance minister.

However, Pisit and Salinee Wangtan, a former Bank of Thailand senior official and now the head of the government-intervened Nakornthon Bank, both admitted that Thai banks, saddled with a high level of NPLs, have not yet got out of the woods, though they could turn to the banking-reform package as the last resort if they needed the capital to assure solvency.

Finance Minister Tarrin Nimmanahaeminda, with his back against the wall, was forced to put out the banking-reform package, which sought to underwrite the banking system with Bt300 billion in public money.

The objectives were to provide direct government support to any bank that did not have enough capital to lend and to cover damage by the NPLs. Apart from underwriting the entire banking system with assurances that it would not fail, the package also outlined a road map of how the government would deal with the intervened banks, from the Bangkok Bank of Commerce, Laemthong Bank, Bangkok Metropolitan Bank, First Bangkok City Bank and Union Bank of Bangkok to the Krung Thai Bank.

So far the financial authorities have provided Bt38.39 billion in both tier-1 and tier-2 capital support under the bailout programme to banks and finance companies. Of this, Bt35.50 billion -- Bt32.5 billion for Siam Commercial Bank and Bt3 billion for Thai Investment and Securities Plc -- represents tier-1 capital, and Bt2.89 billion tier-2 capital.

Another 11 banks and finance companies are lining up to seek capital support totalling Bt42.41 billion from this programme. Of this amount, Bt20.92 billion is in tier-1 capital and Bt21.49 billion in tier-2 capital.

Overall, the capital support that has been provided and will be provided totals Bt80.81 billion, which represents only 27 per cent of the Bt300 billion allocated under the programme.

But Salinee said the efficacy of the programme should be judged by the indirect effect it has had on the banking system, for it provides assurances of the availability of official money as the last resort.

''At least, it should have an indirect effect on the decisions of the investors so that when they buy into bank stocks they understand that if the banks cannot recapitalise by themselves, they have the government to turn to. The government will equally match the amount of capital the banks need to raise, which can be used to recapitalise or set aside for loan-loss provisions,'' she said.

There are several reasons why bank credit has shrunk. Customers who have been servicing their loans still get bank credit, at larger or smaller amounts depending on their businesses. But a number of businesses might fail, or banks have converted their customers' debt into equity. Banks may also take a hit by forgiving some of the debts through haircuts. Some banks' assets are being transferred to repay the debts.

Despite the seeming withdrawal of the banks from lending in absolute terms, the banking system still functions by providing trade financing, letters of credit or guarantee services.

''Don't just look at the credit alone because the economy is still moving (with the help of other functions of the banks),'' Salinee said.

Vichai Punpocha, the Thailand representative of Dresdner Bank, also tried to look at the positive effect of the Aug 14 banking reform package, arguing that it was not simply enough to judge the package by associating it with the high NPLs in the banking system or with the falling bank credit.

''One must remember that in the period before the launch of this programme, Thai banks were really in bad shape. They could not even open a letter of credit, which had to be confirmed by another foreign correspondent bank. The situation was very grave. The Thai people were afraid that eventually Thailand might end up with only one bank left, the same thing that Mexico had experienced under the last IMF support programme,'' Vichai said.

After the banking restructuring programme had been put in place, Vichai said, conditions in the banking system stabilised, which improved the credit rating of Thailand and for some of the banks who can now open letters of credit.

''This is the most important consequence of the programme that should not be overlooked,'' he said.

But the pace of the process of banking restructuring, particularly the way banks are dealing with their NPLs, still leaves much to be desired.

Vichai pinpointed the weakness of the rescue programme saying that it had failed to set the deadline as to when the bad debts should be cleaned up through asset management corporations (AMC) that individual banks form.

Moreover, by failing to consolidate the balance sheets of the banks by the establishment of ''bad banks'' and ''good banks'', there is no way one can know the exact amount of damage the banks will have to shoulder from their bad debts, even though the burden will eventually be born by the Financial Institution Development Fund.

Unlike the Chilean model, where all the NPLs in the banking system were nationalised through a carve-out strategy, the Thai model calls for banks to tackle the NPLs by themselves by setting up their individual AMCs.

Thai Farmers Bank has already announced a plan to do so by hiring Goldman Sachs and GE Capital to manage its Bt80 billion worth of NPLs out of a total figure of Bt240 billion. Krung Thai Bank is also in the process of creating an AMC.

The risk in the Chilean model was that banks might indiscriminately pass all the burden of the NPLs to the government-run AMC, Vichai said.

He added that most Thai banks not involved in the programme were still dealing with their NPLs the hard way.

Pisit responded understandingly to Vichai's concern, saying that despite two years of banking distress, the problem of debt restructuring was still lingering.

He said that at a meeting between the debtors and creditors, that had been mediated by the Bank of Thailand last week, he asked about the existence of any government regulations that stood in the way of debt restructuring.

He got a ''no'' for an answer and went out with the impression that the wrangling had boiled down to a failure of the creditors and debtors to cut a deal and get over their past mistakes.

''You just look at the debt-restructuring process of a big petrochemical company as an example. In fact, the negotiations had started even before the baht crisis. Whenever the final agreement was to be signed, there emerged some nitty-gritty points that stood in the way. And this had been going on forever,'' said Pisit.

There is progress in the debt restructuring, but it is too slow for everybody's satisfaction. Of the Bt2.7 trillion in NPLs or 47 per cent of total loans in the banking system, Bt1.5 trillion is owed by more than 600 companies.

This amount has been placed within the framework of the Corporate Debt Restructuring Advisory Committee, mediated by the banking regulators. So far the regulators have helped to restructure Bt600 billion in NPLs from this framework.

Pisit said some Bt100 billion in NPLs is being restructured every month.

Yet there remains more than Bt1 trillion of NPLs that are outside the official framework of the Corporate Debt Restructuring Advisory Committee that the banks will have to cope with all by themselves.

Pisit said there were three explanations why they were placed outside the official framework. First, banks already are overloaded with the NPLs that they have to tackle within the framework. Second, they already know how to deal with these NPLs without official mediation. Third, the NPLs represent cases that are irrecoverable and will have to go through a bankruptcy or foreclosure process.

However, the Bt2.7 trillion in total NPLs could be misreported by the banks' filings to the Bank of Thailand, Pisit said.

Since the central bank only requires the banks to report any loans that miss payments for three consecutive months as NPLs, some banks, for their own prudent practices, have added classified loans as NPLs.

Classified loans are the loans on which banks would doubt the customers' ability to service the interest or the principal, even though the clients were still servicing the debts. In this case, a bank looks at the whole operations of the customer, who is operating with losses for, say, three years in a row, and assumes that the loan would become an NPL eventually.

To protect themselves, banks set aside provisions to cushion against this risk and by doing so they keep the capital to themselves instead of returning it to the shareholders through dividend payouts.

But the definition of the NPLs will have to be followed strictly if the authorities are supposed to know the real situation.

Dr Sirichai Sakornsirikul, a senior official at the Industrial Finance Corporation of Thailand, attacked the IMF support programme as contributing to the worsening of the Thai crisis, adding NPLs to the system and hammering economic growth.

Talking of the times when the IMF package was adopted, he said: ''Thailand was then suffering from capital outflow and over-investment in the private sector -- not from public sector over-consumption. But the IMF programme hinged on a monetary approach to tackle the balance of payments crisis.''

Sirichai questioned whether there had been any secret motivation for the US to break into the Thai banking system using the IMF programme as a smoke screen.

Despite the mistake, the situation had reversed in August 1998 with a turnabout in the IMF programme.

The banking reform package, said Sirichai, has cushioned the banking crisis, helping banks to subsequently raise funds through Slips or Caps.

Even amid the banking crisis, Sirichai said, the Thai authorities still adopted the laissez-faire philosophy, allowing banks to largely cope with their problems on their own.

''Under the present setting, the damage has already been done, but the bills have not yet been paid. Actually, some part of the bills has been paid, but what about the rest?'' he asked.

He called for the authorities to come up with a clear idea of how to deal with the remaining damage, because out of a social principle the shareholders of the banks should be made to pay for the damage first.

But it appears, he said, that the banks are pushing their burden on to public depositors and their own good customers, who service their debts regularly.

This point of view is supported by the widening of the spread of bank deposits and lending during the present crisis, compared to the pre-crisis period.

Sirichai said in 1994 and 1995 the spread had stood at 2.45 per cent and 1.80 per cent respectively, while in 1998 the spread had jumped to 5.70 per cent and came down to 4.85 per cent this year.

''It implies that the banks are passing the burden to the public. The point should be made clear that when the damage has been done, the shareholders must be the first to pay, then the government,'' Sirichai said.

Dr Vuthiphong Priebjriwat, a former managing director of Thailand Credit Rating Service Ltd, now an independent academic, warned that the Thai banking system did not have a long way to go before it eventually faces the axe.

He said that when that happens, the process would have to be handled in a transparent manner.

BY THANONG KHANTHONG