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Banks allowed too many carrots and not enough stick

 

Thanong Khanthong  reports on why the banks are dithering over recapitalisation, and the effect it is having.

Banks are a strange corporate animal. They either make filthy profits or become a takeover target. There is no place in-between. During the financial bubble era, the banks and finance companies virtually dominated the Thai economic scene, accounting for 40 per cent of the total capitalisation of the Thai stock market.

When the bubble went bust in 1996, the banks started to see cracks in their balance sheets. By 1997 the Thai financial system, saddled by the non-performing loans of 25 per cent of total loans, was declared technically insolvent. A total of 56 finance companies were shut down; another 12 were intervened along with four banks. The bankers, who had no hesitation in enriching themselves in the old days, began wailing for government hand-outs, saying if their banks do not survive, the country as a whole cannot.

Initially, the finance and banking regulators believed that the banks were too big to fail. Only after the financial industry had faced a systemic crisis did they come to realise that it was impossible to bail out every single finance company and bank. And only after the regulators had spent more than Bt1 trillion to keep the financial system afloat did they come to their senses and realise that only a part of it could be saved. A debate on the public policy over the bail-out of the banking system ensued, serving to reinforce the necessity of keeping the banking system going. Since banks have lent some Bt5-Bt6 trillion to the Bt5-Bt6 trillion Thai economy, they are indeed an alter-ego of the Thai economy.

After the process of trial and error, the regulators finally have come up with a Bt300-billion bail-out scheme, which technically amounts to a nationalisation of the Thai banking system. The bankers initially thought that they might have a free lunch with the package. But after carefully digesting the conditions, they were taken aback by the tough conditions in the programme.

Utilising the official money under the bail-out programme means that the banks either have to write down their capital, change management or take a hit immediately by setting aside full loan-loss provisioning. For this reason, the banks are not going to join the bail-out programme unless they are forced to at gunpoint.

With the delay in bank recapitalisation, NPLs keep on rising. The Bank of Thailand's latest assessment puts this year's NPLs at 40 per cent, or about Bt2 trillion, of total loans. With this NPL burden, banks have stopped lending money to good or bad customers.

A pre-condition of the Thai economic recovery lies in the ability of the banking sector to resume lending. But that prospect is not yet in sight. Instead of handing the banks the stick to accelerate their recapitalisation, the regulators have decided to give them more carrots. All the banks in trouble will be given a two-year time frame -- until November 2000 -- to recapitalise, instead of being forced to raise capital at the start of next year to signal an official bottoming out of the Thai economy.

So far the Thai banking system has raised or planned to raise more than Bt200 billion. But another Bt300 billion in fresh money is needed to fulfill the minimum capital adequacy standard if the NPLs reach 40 per cent. The bail-out programme will help prevent the capital flight from the banking system, but it must be applied more vigorously with the stick.

Earlier banks offered deposit rates as high as 15-16 per cent to attract savings and use the money to re-lend to the Financial Institution Development Fund at 18-19 per cent, making risk-free profits of 3-4 per cent. Now with the removal of the FIDF from the money market into the budget process, the high interest rate structure has collapsed, giving rise to massive liquidity flooding the money market. Interest rates have fallen quickly, albeit much faster with the deposit rates than the lending rates.

At one point, Prime Minister Chuan Leekpai took the Bank of Thailand to task for failing to supervise the banking industry adequately by allowing the banks to maintain a spread of 6-7 per cent. In other words, the banks are ripping off their customers. They are squeezing the profit sponge to subsidise their NPLs.

This is helping them to delay their recapitalisation, which directly eats into their pockets. In the meantime, the falling interest rates have given the stock market a big boost, raising hopes that the economy is stabilising after facing a free fall over the past two years. Bank stocks have been on an uptrend because the Thai stock market has always been liquidity-driven rather than earnings-driven. But the danger is that it gives the impression that banks, which have enjoyed a temporary respite, might not have to undertake any drastic steps to restore their health.

With the momentum on the back of the battered Thai economy, it is time that the regulators took stern action by adopting a speedier timetable. If banks fail to lend money or function normally, they should face a capital write-down and nationalisation by the government.

A delay in bank restructuring will only delay full recovery of the Thai economy. The public have tolerated the banks for long enough, not to mention the hand-outs needed for them to recapitalise. The banks must reciprocate. They have eaten enough carrots -- now it is time for a bit of stick.

 

 

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