Tarrin sees four fallacies in an AMC
February 2, 2001
BANK stocks have been soaring sharply since the decisive election victory of the Thai Rak Thai Party, which has pledged to form a national asset management company to bail out the banks. Of course, the staunchest opponent of a national AMC is Finance Minister Tarrin Nimmanahaeminda, who would have established one if he believed that this was the right method to tackle the bad debts in the banking system.
To Tarrin, there are a number of fallacies associated with a national AMC which would not lead to an expansion of bank credit but rather create a heavier debt burden for the country.
"The first fallacy is that once the national AMC has bought the bad debts from the banking system, the banks will launch a lending spree. That will not happen," Tarrin said in an interview. Bankers from Chulakorn Singhakowin of Bank of Asia to Banthoon Lamsam of Thai Farmers Bank appear to support this view. Even if all bad debts were taken off their books, they would still be unwilling to lend because of a lack of good customers.
Although banks would have more capacity to lend, they would be unwilling to. Lending is a complex issue, depending on the overall health of the economy and other factors. "Don't mix up the capacity to lend with the willingness to lend. They are different," Tarrin said.
The second fallacy is that the AMC would treat all parties fairly. Tarrin said the biggest question facing the AMC was what price it would pay for the transfer of the banks' bad assets. If the transfer price is set low, it would benefit the bankers and their shareholders. If the transfer price is high, the taxpayers would benefit.
The third fallacy is that the AMC would be more effective because it would bring all bad debts under one roof. "Managing the national AMC will become a big problem in practice," Tarrin said. "For if it is a state enterprise, the people running it will be treated as civil servants. Normally civil servants do not dare to make decisions. They are rather inert in tackling problems. It will also be susceptible to corruption. It's better to let the private sector go after the debts."
The fourth fallacy is that the AMC would speed up debt restructuring. "On the contrary, it might create a moral hazard because most of the debtors would like to have their debts transferred automatically to the AMC rather than keeping their debts at the banks, which are tougher to deal with," Tarrin said. "In the national AMC, the debtors would not have an incentive to repay. The problem might spread out to affect the stability of the financial system."
In Malaysia, Prime Minister Mahathir Mohamad set up a national AMC shortly after the banking crisis. But it was accompanied by the passage of dual-track legislation to cope with the debt restructuring. Debtors forced into the national AMC are squeezed by the authorities, so their incentive is to try and reach a restructuring deal with their creditor banks.
Tarrin said in Thailand, which has a different political and judicial structure, it is impossible to introduce legislation similar to the Malaysian model. That has complicated debt restructuring, which must be supported by a stronger judicial framework.
Moreover, once the debts are transferred to the AMC, it would be difficult to restructure them because some debtors need further financing from the banks. The creation of the AMC would not ensure debtors could get a credit line from the banks to restore their businesses.
So far Tarrin has relied on a mixed strategy to deal with bad debts, from auctioning off the bad assets of 56 defunct finance companies, official intervention to merge weak banks and making available official capital to help the remaining banks re-capitalise. Private banks are encouraged to set up their own AMCs to deal with their debtors. The government has also formed a Corporate Debt Restructuring Advisory Committee to mediate the talks between creditor banks and debtors.
"We have done quite a lot in bringing down the bad debts, which were around Bt2.5 trillion. Now they are about Bt1 trillion," Tarrin said.
However, Thai Rak Thai is expected to go ahead with forming the AMC as promised during the election campaign. Yet most people believe it will take at least six months before it is up and running.
It represents a comprehensive way to deal with bad debts once and for all. But along the way, it's going to be an arduous task to sort out the huge garbage pile in the Thai economy's backyard.
BY THANONG KHANTHONG