Restructuring role urged for AMC

January 29, 2001

THE establishment of a national asset-management corporation (AMC) to buy out the banking system's bad debts will not make much of a difference if it fails to accelerate corporate debt-restructuring, experts say.

Taking part in a Nation Multimedia Group panel discussion last week, Chulakorn Singhakowin, chairman of the Thai Bankers' Association, questioned the underlying motive of the Thai Rak Thai Party's policy of forming a national AMC.

"If the national AMC is aimed at encouraging banks to go on a lending spree, then my guess is it's not going to work. But if it helps accelerate overall corporate debt-restructuring, that's something we may want to take into consideration," Chulakorn said.

Dr Ammar Siamwalla, a respected economist and advisor to the Thailand Development Research Institute, was similarly cautious in his appraisal of Thai Rak Thai's AMC plan, details of which have yet to be worked out.

"We don't know what's in it: the national AMC is still just a piece of paper," he said. But if he were to make a guess, Ammar said, the best thing from the banks' point of view would be for the government to set a standard price for transferring non-performing loans (NPLs) to the national AMC. If the standard transfer price were 50 per cent, for example, the banks really would dump irrecoverable NPLs on the national AMC, keeping the best to themselves. If the government put a fixed rate on NPL transfers, however, the banks would face losses, he said.

With the nation's economic recovery struggling under the weight of somewhere between Bt1.5 trillion and Bt1.8 trillion worth of outstanding NPLs, Thai Rak Thai, which is to form the next coalition government, made the AMC one of its key campaign policies. NPLs account for more than 20 per cent of the total credit extended by the Thai banking system.

Since the party has not yet drawn up the guidelines for the AMC, nobody knows how much public money would be used to bail out the banks. Government-controlled lenders, however, already account for about 60 per cent of the outstanding NPLs.

The outgoing Democrat-led government tried to tackle the NPL problem using a combination of bank closures, auctioning off assets of the country's 56 defunct finance companies, and bank recapitalisations using public funds. But critics say financial-sector reform and corporate debt-restructuring have been too slow, hampering economic recovery.

Thai Rak Thai plans to use public funds to buy the NPLs from the banking system all at once, leaving the banks with only good assets. In theory this should encourage the lenders to take risks again, expanding credit and jump-starting the economy.

But lending, which has been contracting since the 1997 economic crisis, is a complex issue. For the banks to start lending again, the overall economic situation must be healthy. With Thai industries' capacity utilisation standing at 50 to 60 per cent there are not enough borrowers around. Moreover recent tightening of bank standards and regulations has led banks to become more conservative. Thai corporations' failure to improve their accounting procedures and cash-flow projections is another deterrent to lending.

In the end the NPLs will have to be resolved if Thailand is to get on its feet again economically.

Chulakorn expressed concern over the present legal framework, which has stalled the corporate debt-restructuring process. Because the law does not permit creditors to follow through with the bankruptcy and foreclosure process, he said, debtors still have the upper hand. Chulakorn wants to see the AMC given a legal mandate to tackle debt-restructuring, like that enjoyed by a similar agency in Malaysia. In other words, the present method of restructuring NPLs is compromised and going nowhere.

Conflicting signals are also being sent by Thai Rak Thai. Through the establishment of the AMC the party wants to dispose of the NPL problem in one fell swoop. But some party members actually want to amend the bankruptcy laws to give more protection to debtors.

Dr Supavud Saicheua, chief strategist at Merrill Lynch Phatra Securities, was more comfortable with the national AMC plan. One of the main benefits of the AMC, he said, is that it brings all NPLs under a single roof. This speeds up corporate debt-restructuring, leading to an overhaul of the whole economic structure, which is currently burdened by overinvestment during the economic bubble years. As an example Supavud cited the fact that there were five steel companies in Thailand burdened by overcapacity, and all of them look likely to end up with NPLs. Intervention by a national AMC could result in Thailand ending up with only two steel companies, he said.

Merrill Lynch Phatra has proposed a number of models for a national AMC. Supavud appeared to favour one in which the banks would transfer both their provisions for bad loans and their NPLs to the national AMC. The provisions, raised by the banks to the tune of Bt900 billion via recapitalisations over the past three years, would be booked as assets of the AMC while the NPLs would be booked as liabilities of the agency. This way the government would not need to inject any public money into the AMC in the initial period of its operation. Losses incurred from the liabilities over assets would appear over the years, but this would be worthwhile if the agency served its purpose of cleaning up the NPLs once and for all, he said.

BY THANONG KHANTHONG