THE finance and banking regulators yesterday took emergency steps to prevent a financial system breakdown by ordering commercial banks, finance and credit foncier companies to raise massive capital ­ to the tune of Bt50 billion over the next two years ­ to cope with their mounting non-performing loans.

The package, unveiled yesterday by Dr Amnuay Viravan, the finance minister, and Rerngchai Marakanond, the Bank of Thailand governor, is designed to allay fears of a financial crisis following the unexpected admission by Finance One Plc that it is seeking a merger with Thai Danu Bank as a means of bailing itself out of financial trouble.

Flanked by Chartsiri Sophonpanich, president of Bangkok Bank Plc, and Banthoon Lamsam, president of Thai Farmers Bank, Amnuay and Rerngchai went on a nationally-televised news conference to assure the public that the authorities are monitoring the asset quality of financial institutions closely and will be working with them to strengthen their balance sheets by raising new capital and increasing provisions for doubtful debts.

Over the next two years, banks and finance and credit foncier companies will be required to raise a combined Bt50 billion, Bt24 billion of which will come from banks and Bt26 billion from finance and credit foncier companies.

Moreover, all the financial institutions will be required for the first time to set aside provisions to meet 100 per cent of their non-performing loans, in line with international banking standards. Currently their provisions are restricted to a 100 per cent provision for only doubtful debts. Debts assumed by the financial institutions are broadly classified as doubtful debts, non-performing loans and bad debts.

Sentiment has been extremely bearish in the financial markets as investors are forced to play a guessing game over the asset quality of Thai financial institutions. The Thai Danu Bank/Finance One merger appears to have confirmed the rumours that the bad debt cycle of the Thai financial industry has yet to peak.

Before the news conference, however, Amnuay requested that the Stock Exchange of Thailand halt public trading of all bank and finance stocks, marking the first time in the history of the Thai bourse that the two sectors, which account for about 30 per cent of the total market capitalisation, have been temporarily suspended from trading.

Amnuay and Rerngchai also took the unprecedented step of listing 10 ailing finance and credit foncier companies, which need to raise capital immediately. They are Unico Housing Co, Country Finance Co, Royal International Co, Thai Fuji Finance & Securities Co, Finance House Co, Sri Dhana Finance Co, Dynamic Eastern Finance Thailand (1991) Plc, Bangkok Metropolitan Finance Co, Inter-Credit and Trust Co and International Trust and Finance Plc.

The intention is to differentiate the troubled finance and credit foncier companies from the good ones, in order to prevent a systematic deposit run across the entire finance sector. The move appears to have worked to a certain extent. Yesterday Asia Credit, a finance and securities subsidiary of Bangkok Bank, was flooded with new deposits, which were transferred from poorly-managed finance companies.

''With so much demand, we have been forced to refuse a deposit of Bt100 million from a foreigner," said an Asia Credit official.

The authorities' underlying message is stern and the implications of their measures are far-reaching. Cash-strapped finance companies will be ordered by the banking authorities to raise capital immediately if they run into liquidity problems. If they do not have enough money for recapitalisation, the Fund for Rehabilitation and Development of the Financial Institutes will step in with cash to subscribe to the new equity issues.

This measure represents an attempt to deal with the asset quality problems of the financial institutions. Banks will be required, as of June 1997, to maintain provisions for substandard debts and real estate non-performing loans of 15 per cent of the total problem loans, compared with 20 per cent for finance and credit foncier companies.

Half this process should be completed in the first year and the remainder within two years. Analysts yesterday treated this capital increase as bad news for bank and finance stocks because its dilution effect will depress stock prices at a time when it is already difficult to raise cash in the equity market.

Except for some big banks, all the other smaller financial institutions will be strapped in raising capital.

''The stock prices of some small banks will go down to par value. I see the SET index at 600," said one analyst at a foreign broker.

It is apparent that the finance and banking authorities had avoided making public the present figures for non-performing loans in the banking and finance and credit foncier systems. This gives the impression that the package might not be able to tackle all the non-performing loans in the financial system.

As of June 1996, non-performing loans in the banking system reached 7.73 per cent, or Bt317 billion, of total loans of Bt4.2 trillion. By the end of 1996, the non-performing loans of banks reached about 9.8 per cent, or Bt403 billion of total loans.

For finance and credit foncier companies, the non-performing loan ratio was about 10 per cent or Bt120 billion of the total loans of Bt1.2 trillion as at the end of 1996.

An American stock-brokerage firm expressed confidence in a recent report that the Thai authorities will be able to deal with the financial crisis.

''Assuming bank non-performing loans peak at 15 per cent, with 20 per cent unrecoverable, and finance company non-performing loans peak at 20 per cent, with 20 per cent unrecoverable, the write-off would be equivalent to approximately US$10 billion (Bt260 billion), which would represent 34 per cent of the financial system's equity and five per cent of the gross domestic product," it said.

''This should be manageable, given that the workout would occur over time, the expectation that the economy will resume its strong growth after this year, and the government's ability to provide assistance," the American firm said.

This package is reminiscent of the crisis among financial institutions in 1984 when the finance and banking authorities created a Life-Boat scheme to bail out 25 of them. Then 40 or 50 companies went broke from a systematic breakdown of the financial system and a crash of the stock market.

So far, the Thai financial system has not arrived at the critical level, yet non-performing loans from the real estate sector are increasingly undermining the asset quality of financial institutions. Banks and finance and credit foncier companies have about Bt700 billion to Bt800 billion in exposure to the sagging real estate market.

It is apparent that the measures announced yesterday are too little to deal with the banks' and finance companies' real estate portfolios. Rerngchai hinted that other weak finance companies are also welcome to join the rescue scheme set up by the fund and they will be encouraged to merge, so as to create fewer entities. He said that the government is ready to put up two additional commercial bank licences for merged finance companies.