Rerngchai Marakanond, governor of the Bank of Thailand, must overcome the crisis to save the Thai financial system. Vatchara Charoonsantikul and Thanong Khanthong write.

Buoyed by his bushido training from Japan, Rerngchai Marakanond, the Bank of Thailand governor, is confronting the financial system crisis with a katana in his hands.

The criticism has been particularly acute over Rerngchai's unprecedented move on Monday when he announced the names of 10 troubled finance and credit foncier companies. Yet, by law and as guardian of the financial system stability, Rerngchai is empowered to take drastic action against these companies, whose shareholders' equities may have already been wiped out by financial losses.

It is this kind of deep financial trouble that has led Rerngchai to bring out his samurai sword. It was indeed Black Monday crisis management. Had Rerngchai failed to produce the list of the troubled finance and credit foncier companies, the panic of a deposit run would have set in across the sector.

On Tuesday, a run on the finance company sector did take place, amounting to about Bt9.4 billion ­ Bt4.4 billion from the 10 troubled finance and credit foncier companies alone. Rerngchai responded in time by sending out a clear message that the BOT would aval all the promissory notes in the finance sector.

This effectively calmed the turmoil. Yesterday, the pace of the run appeared to have slowed, as witnessed by a shrinking of the interbank rate to 7.5 to 8 per cent compared to 11 to 13 per cent last week. Yet the interfinance rate remained persistently high at 16 to 18 per cent, reflecting a severe money market crunch.

Finance Minister Amnuay Viravan gave Rerngchai his full backing throughout the episode. Yet his action was not appreciated by some of his Cabinet colleagues, particularly Chavarat Charnvirakul, the deputy finance minister.

Chavarat, who joined the Cabinet under the Chat Pattana Party quota, reprimanded Amnuay for the inadequate package to deal with the finance sector, saying it was widely known that about one-third of the finance companies were in trouble.

However, the law empowered the banking and finance authorities to deal with potentially bankrupt finance companies or banks. Those finance companies that are not on the list have been required by Monday's announcement to raise a combined Bt26 billion in fresh capital over the next two years as provisions for their non-performing loans. Commercial banks will also need to raise Bt24 billion over the period to strengthen their balance sheets.

Yesterday, the Association of Finance Companies indicated that this amount might be too large, coming at a time when its members are severely strapped for cash. The association has appealed to the banking authorities to review this measure. On Saturday, the Association of Finance Companies will hold a meeting, to be attended by all the top finance and banking regulators, to discuss the future of the industry.

Rerngchai must have realised that he cannot afford to lose this battle, no matter how tough it gets. The battle can only be won through his guidance to lead a wave of mergers and acquisitions among the more than 90 finance companies in the system. Most of these finance companies have no justification for continuing their businesses.

Let's face it, the property market is threatening to trigger a chain effect in the financial system crisis. Of about Bt800 billion in total loans extended to the property market, finance companies account for around Bt400 billion. The property slump is strangling them.

The 10 troubled finance companies on the black list have been ordered to raise a combined Bt8.25 billion in fresh capital immediately to cope with their loan-loss provisions. If they do not have the money, the Fund for the Rehabilitation and Development of the Financial Institutions will do it for them.

This means that the banking authorities may be pondering ordering these finance companies to reduce their capital by writing off the bad debts, after which the fund would subscribe to rights issues on behalf of their cash-strapped shareholders. The banking authorities would then lump all the troubled finance companies together for mergers and acquisitions, in the hope of reducing their number significantly.

Rerngchai has sweetened the deal by promising to hand out two additional bank licences for merged finance companies.

Rerngchai's biggest challenge is to save the financial system from going bust. If he can shake up the sector through mergers and acquisitions, his standing in the history of the Thai financial system will be secured. The mistake made in the Life-Boat scheme of 1984 should not be repeated.

Although Monday's measures to salvage the finance sector might be too little or too late, they amount to an admission by Rerngchai and his regulators that Thailand is facing a severe problem with the asset quality of the financial institutions. They are going to deal with it in a systematic fashion.

The problem is where all the money will come from to bail the sector out. Undoubtedly a significant amount must come from overseas. The market is experiencing a severe credit crunch and interest rates have to be kept high to defend the baht.

So the Finance Ministry's roadshow to issue US$500 million to $700 million in Yankee bonds this month is a step in the right direction. This fresh capital will not only help improve liquidity in the Thai financial system but also change Thailand's external debt profile.

Bigger or financially-better financial institutions must also be encouraged to raise offshore money to cope with the domestic liquidity crunch.

Whether Moody's Investors Service will be happy with Rerngchai's action remains to be seen. Representatives of the rating agency, who met Amnuay yesterday, are scheduled to hold discussions with Rerngchai today. They are expected to focus their questions on how the Thai financial system can emerge from this crisis as healthier.