ON top of the Bt58.25-billion rescue package unveiled on Monday by regulators to strengthen the asset quality of financial institutions, is another Bt100-billion zero coupon bond issue which will be backed by a Finance Ministry guarantee and have a maturity of five years.

Zero coupon bonds are debt securities issued at deep discounts which pay no annual interest, only the full amount at maturity. This zero coupon bond package was originally destined to be presented to Cabinet for approval on Tuesday but officials withdrew it on the grounds that they needed more time to fine-tune the details.

The so-called Secondary Mortgage Corporation, a vehicle set up to bail out the sagging property market, will use the money raised from the zero coupon bonds to re-finance cash-strapped property projects. This should improve the liquidity of the property projects over the next five years, by which time the Thai economy is expected to be healthier.

A closer look at the rescue package shows that over the next two years, new and old provisions for loan losses amongst the financial institutions will add up to about Bt170 billion, which should be enough to calm nervousness over the deteriorating asset quality of the financial system.

A US investment bank has assumed that non-performing loans in the real estate sector will reach Bt250 to Bt260 billion of the total bank and finance company exposure of Bt700 to Bt800 billion. Therefore, the rescue package and the zero-coupon bonds, amounting to a combined Bt270 billion, should be enough to take care of the non-performing loans in the real estate sector, the real cause of the present financial crisis.

Amnuay Viravan, the finance minister, and Rerngchai Marakanond, the Bank of Thailand governor, should be highly commended for their bold move to tackle the asset quality problem of Thai banks and finance companies by requiring them to increase their provisions for non-performing loans. The package, by all accounts, is a bitter medicine.

Last year, the commercial banking system posted net profits of Bt70 billion. The 15 banks have already set aside a combined Bt94 billion in outstanding loan-loss provisions. Under Monday's rescue package, they will be required to reserve another Bt24 billion to cover 15 per cent of the non-performing loans. Since this process must be completed in two years, the banks will still have some breathing room.

Non-performing loans are sometimes called substandard loans, which means they are backed by collateral but have difficulty making interest payments. Yet non-performing loans are not doubtful debts or bad debts, which must be backed by 100 per cent reserves.

Foreign analysts prefer to classify non-performing loans as bad debts, so their perceptions about asset quality in the Thai financial system may be gloomier than they should be.

Finance companies are really fighting an uphill battle. Last year, net profits of finance and credit foncier companies amounted to Bt17 billion. However, they will be required by the rescue package to set aside an additional Bt26 billion in loan-loss provisions to cope with 20 per cent of their non-performing loans. They have already provided Bt20 billion in outstanding loan-loss provisions.

With these huge additional provisions, it is no surprise that the Association of Finance Companies has bitterly complained that their members just cannot do it. Tomorrow, the association will discuss the matter with the banking regulators at the annual meeting in Pattaya.

Altogether, banks will have to set aside provisions of Bt110 to Bt120 billion over the next two years, compared to Bt46 billion for finance and credit foncier companies. Together, the provisions of banks and finance and credit foncier companies add up to a staggering Bt166 billion.

The 10 finance and credit foncier companies which have been black-listed will be required to raise Bt8.25 billion in fresh capital immediately to cover their provisions. If they can't find the money, the Fund for Rehabilitation and Development of the Financial Institutes will do it for them.