May 22, 1999 -- THE war on interest rates is brewing up again, this time it
is at fever pitch. Banthoon Lamsam, the chairman of the Thai Bankers'
Association, has lost his cool, hitting out at Tarrin Nimmanahaeminda, the
finance minister. Fed up with the portrayal of the banks as the bad boys, he
asked Tarrin sarcastically to spell out clearly what kind of interest rate
directive the minister would like the banks to follow.
This comes after widespread criticism that the banks are taking advantage of
the system by acting too quickly to cut deposit rates but moving too slowly to
slash lending rates. By doing so, the banks have managed to keep the wide
nominal interest rate spread -- the differential between the lending and deposit
rates -- at 4 to 6 per cent, a wide margin to help them ride out of the bad-debt
problems at the expense of depositors and model borrowers.
On Thursday, a day after Thai Danu Bank took the lead by cutting its savings
rate by 0.50 percentage points to 4 per cent and the prime rate by only 0.25
percentage points to 9.50, Tarrin immediately came under pressure. He had to
explain to the public why their hard-earned savings were getting a meagre return
when they were already suffering from the economic crisis.
However, Tarrin buried himself in vague terms, saying the authorities had
been signalling a downward trend in interest rates which should be allowed to
move according to the market mechanism. In other words, the savings and deposit
rates that have been brought down must be matched by a slash in the lending
rates.
The Law Society of Thailand, led by Sak Kosaengrueng, fuelled the emotional
debate by issuing a statement of condemnation against the commercial banks. It
charged that the banks' interest rate manoeuvre amounted to their ''farming on
the back of the Thai people''. It called for the banks to effectively narrow
their nominal spread to 3 per cent.
After talking it over with fellow bankers late Thursday, Banthoon waited
until yesterday morning to launch a counter-attack. Even with this wide nominal
spread of 4 to 6 per cent, Banthoon said most banks are still losing money every
day due to the burden of non-performing loans. Based on the assumption of NPLs
running at 40 per cent, the banks will on the average be mustering a net margin
of only 0.2 per cent. For the banks which have an NPL rate of more than 40
percent, they are running on a negative spread.
''Is it right that the minister would like the nominal interest rate spread
to fall to 3 per cent? If not, what is the appropriate spread for the Thai
system? Please don't say it ambiguously that interest rates have to be set
according to the market mechanism. If the government makes a clear announcement,
we'll know that it is the policy of the country -- not a flip-flop between the
Finance Ministry and the Bank of Thailand. And if the banks are to lose money,
what will be the government's action?. Where will Thailand end up?'' Banthoon
said.
Banthoon's suggestion was that the banks are already doing their best (by
keeping the wide nominal spread) to stay afloat and not to become a burden on
society. If they fail the result will eventually land on the head of the
tax-payers. Tarrin yesterday declined to trade words with Banthoon, saying the
banker could say anything he wanted to because it was merely his opinion.
This further added to the confusion. To put things into perspective, the
radically distorted interest rate structure arises out of the impaired banking
system. Although the short-term interest rates have been brought down to their
historic lows -- with the interbank rate falling to 1.25 to 2 per cent and
repurchase rate to 0.8125 per cent -- the banks are not bringing down their
rates fast enough. The prime rates are still high at 9 per cent or more, not to
mention the more expensive rates, or the minimum retail rate (MRR) plus, for the
small-time borrowers because the banks need this wide spread to offset losses
from the NPLs.
This problem can be dealt with only if the banks raise enough capital to
cover 100 per cent of their loan-loss provisions. By doing so, the banks'
shareholders will assume full responsibility for the NPLs. Then they won't have
to worry about past mistakes and the interest rate system will be fully
repaired.
In fact, bankers can no longer claim the right to ownership or management
when the NPLs of their banks run up to 40 to 50 per cent. Under normal
conditions, running an NPL at a level of 15 per cent or more warrants official
intervention. The same applies if the bank faces a 2 per cent loss from its
shareholders' equity, which must be officially maintained at 8 per cent at all
times.
This leads to the conclusion that the government lacks the political will to
deal with the undercapitalised banks, which have managed to avoid the hard
choice of raising equity for fears of a dilution effect on their holdings and
losing management control.
As the banks have failed to capitalise sufficiently, the interest rate
structure will continue to be distorted. The weak banking system will continue
to hold the economy hostage. The banks should take this window of opportunity of
bouyant sentiment in the stock market to issue equity. That would be responsible
action, if not for their own sake then for the sake of the country.
BY VATCHARA CHAROONSANTIKUL and