September 5, 2000

Thanong Khanthong looks at the Democrats' temptation to nationalise the banking system's bad debts.

Given the creeping progress achieved by current approaches, the Democrats are increasingly being tempted to nationalise the non-performing loans in the banking system.

As of July, non-performing loans comprised 31 per cent of the total loans in the banking system, creating a severe drag on the economic recovery.

Government sources say the Democrats are drafting their economic platform now, and it will include additional measures to reduce non-performing loans.

Deputy Prime Minister Supachai Panitchpakdi, sources say, has proposed nationalising the bad loans to relieve the burden on the banking system and inject some life into the recovery. This also would help address the weakness in the Thai secondary market for asset management.

This proposal is not new. Last year Supachai proposed that the government nationalise some of the bad debts, to reduce the level in the system to 10 to 20 per cent of the total loans.

However, Finance Minister Tarrin Nimmanahaeminda rejected this idea, preferring a market-oriented approach. Moreover, there was an overriding political factor to consider. Bailing out the banks would amount to "helping the rich at the expense of the poor".

Meanwhile, Tarrin has focused on government-assisted recapitalisation, and has given short shrift to the asset-management approach. But Thailand does not have a large secondary market for asset transactions, nor the experience to handle this process. The result has been a prolonged banking crisis.

But the Democrats apparently have realised that helping the banks through recapitalisation alone is not enough.

"Our banking problems are very serious. We should not be too dogmatic in tackling the non-performing loans. There can be several ways to tackle them, such as forming private asset-management firms, public asset-management firms or even setting up a national asset-management agency," a government source said.

"The government must step in to add more purchasing power in the secondary market for asset management," the source added.

In its economic policy platform, the Thai Rak Thai also has proposed nationalising the bad loans. But details of its plan remain sketchy.

Earlier Merrill Lynch Phatra had estimated that between Bt1.2 trillion to Bt1.5 trillion of non-performing loans could not be restructured, and therefore must be liquidated.

If the government were to nationalise the bad debts, its toughest task would be setting a "fair value" benchmark for the assets. This process is bound to be controversial because assigning a fair value while transferring bad loans, at a discount, to government run asset-management companies is not an exact science.

If the data on the loans is unclear, bidders will consider them riskier, and will propose very low prices for them, further undercutting the banks' positions.

The Financial Sector Restructuring Authority (FRA), for example, mixed good assets with bad assets when selling the assets of the 56 defunct finance companies in the wake of the financial crisis. The result was that bidders proposed relatively low prices for the combination. Still, the FRA raised an average of 33 per cent of the face value of the assets.

By comparison, DBS Thai Danu Bank fared even worse, raising about 29 per cent, or Bt8.4 billion of the face value of Bt30.6 billion when it sold its bad loans.

If the banks don't receive enough for the assets, their provisionings will suffer, requiring them to raise additional fresh capital. DBS Thai Danu was able to write a check for the difference, but undercapitalised banks are too weak to take the same approach.