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Tarrin's diminishing stature may fuel compromise


March 10, 1999 -- Thanong Khanthong and Vatchara Charoonsantikul say the weakening political stature of Finance Minister Tarrin Nimmanahaeminda might lead to a compromise on the crucial banking reforms.

FINANCE Minister Tarrin Nimmanahaeminda's weakening political stature is undermining the hard-fought banking reforms, offering the spectre of a prolonged economic recovery.

Since recovery prospects remain dim, support for Tarrin to carry on the banking reform appears to have weakened politically. A Senate report, authored mainly by Dr Virabongsa Ramangkura, called for the government to relax its measures on banking reform, which has only, it charges, worsened the health of the banking industry. If the government continues to toe the International Monetary Fund (IMF) line, it might eventually have to nationalise all Thai banks, a real nightmare for the Thai economic system, he further warned.

On Monday Dr Supachai Panitchpakdi, the deputy prime minister and commerce minister, also took time off from his World Trade Organisation bid to focus on the banking reform. He promised to take a hard look at the Aug 14 Banking Reform Programme to see why it hasn't worked. By doing so, the government has begun to admit that the banking reform programme, a beautiful conceptual design, may need to be fine-tuned to suit the real world.

What then are the ramifications of this critical move, which might lead to some adjustments to the Bt300-billion banking reform package? Supachai said he has total confidence in the spirit of the banking reform package, except that some of its details might have to be adjusted to make it more practical. Any further delay in banking reform will also dampen prospects of a recovery.

Since its inception last year, only Siam Commercial Bank has formally applied for Bt26-Bt27 billion in government funds to support its Bt52-Bt54-billion recapitalisation. Thai Military Bank should soon enter the tough programme, so will other smaller banks and finance companies.

But most other bigger privately-held banks still resist the temptations of government money for fear of losing their ownership and management control -- the two tough conditions that accompany the banking reform package.

Any minor changes to the banking reform package might be acceptable to the IMF, but its core philosophy cannot be compromised. At a recent roundtable discussion, Stanley Fischer, IMF's first deputy managing director, told Thai academics that infusion of government money to bail out the banks should not benefit cronyism or the old family shareholders, who committed the mistakes or caused damage to their banks in the first place.

''[The bail-out] usually has to be done in a way which ensures that those who committed the mistakes, that helped create a crisis as deep as this one, don't benefit from it,'' Fischer said.

''That usually involves changes in management, changes in ownership, or at a minimum a severe dilution of ownership. It's very unpleasant for those who own the banks and of course they will always fight it politically. In terms of incentives and social justice, it's important that the previous owners are not the beneficiaries of government funds, which are intended to get the economy restarted and create a new healthy banking system.''

Guerrilla warfare

Tarrin is engaging in guerrilla warfare principally against the Sophonpanich, Lamsam and Ratanarak families, who control Bangkok Bank, Thai Farmers Bank and Bank of Ayudhya. His strategy is to force them, little by little, into the corner until they give in by seeking tier-1 capital support from the Aug 14 Banking Restructuring Programme. Once these banks undergo a one-time surgery by tapping government money, they -- presumably under new managements -- will be in a position to re-lend money again.

For sure, these family banks, which control more than 40 per cent of the market share, have resisted the government's tier-1 capital support, which to them is laced with Tarrin's poison.

Tier-1 represents the core capital of the banks, which are required to maintain the ratio at 4.25 per cent of the total risk assets, mostly loans. But since the banks are suffering from rising non-performing loans (NPLs), which will eat into their core capital through write-downs, they are not likely, looking down the road, to be able to maintain the capital adequacy ratio.

To Tarrin, however, there is nothing wrong with the Aug 14 Banking Restructuring Programme, considered his brainchild. If there is any weakness in the package, it lies in the family shareholders, who cannot admit to the cruel fact that the banks, saddled with 40-50 per cent NPLs in their books, are no longer theirs.

Tarrin's dilemma is that 18 months into the Thai crisis, time is not on his side. Patience with his leadership to lift the Thai economy out of the recession is running thin. If the economy does not show signs of improvement after the first half of this year, Tarrin has admitted that he would be in deep political trouble.

And for the economy to take off, the banks must function in their intermediary role or must start to lend out money again. But the bankers have argued that the government must tackle the economic problems first before they start to extend fresh loans. Any lending of new loans will have to be backed by new capital, a luxury that the banks do not have.

Chulakorn Singhakowin, the president of the Bank of Asia, said while he supports banking and corporate reform, he sympathises with the banks for their extreme caution over credit during this time of severe economic recession. ''If the banks are not careful with their lending, they might add more NPLs to their books,'' he said. ''The most important thing that banks should do now is to work on corporate debt restructuring by looking into the appropriate debt-to-equity structure of their clients and moving on from there.''

Tarrin's guerrilla tactic did backfire. His comment given to Goldman Sachs, the US investment bank, that Bangkok Bank was the greatest threat to the banking system led to a big sell-off of the bank's stocks last month. A local newspaper, Manager Daily, took him to task, and certainly beyond sound journalism, by calling him a ''traitor''. Tarrin was forced to come out publicly to retract his comment to Goldman Sachs. The following day he sued Manager Daily.

The episode shows that it is not easy to take on the family banks or win broad-based reform support. It is no secret that Tarrin's relationship with the family banks have worsened.

At a time when he wants the banks to recapitalise adequately and start to lend money into the economic system, the family banks are doing the opposite. Instead of raising the tier-1 capital, they have opted to issue stapled limited interest-preferred structures (Slips), high-interest bonds with equity features. Thai Farmers Bank has raised Bt40 billion through Slips. Bangkok Bank and Bank of Ayudhya plan to raise equally Bt40 billion through Slips.

By issuing Slips, the shareholders have transferred the burden to the banks, which have to pay high interest for the Slips instead of digging into their pockets to subscribe to new equity. Slips also allow the banks to buy time for another two to three years while they continue to downsize their risk assets in earnest to add to the contractionary effect on the economy.

A Bt1-trillion ticket

The scale of the problems in the banking sector is so big that only government intervention can tackle them. Standard & Poor's, the US credit rating agency, has estimated that some US$30 billion is needed on top of the Bt300 billion provided in the Aug 14th package to recapitalise the banking system adequately. S&P's is talking about a Bt1-trillion ticket.

Dr Virabongsa said asking the Thai banks to recapitalise by another Bt1 trillion is asking for the impossible. He called for sweeping revisions in the banking reform package to help the Thai banks weather the crisis otherwise all the banks will eventually fall into the hands of the government. Following Virabongsa's remark, the debate over the banking reform has taken a new twist.

A foreign banker argued in support of the existing programme, saying: ''The Aug 14 Banking Restructuring Programme is working fine. There is nothing wrong with it, save for the main problem that the old shareholders still demand a free lunch and do not want to lose their control.''

He provided a rough calculation that tells the story. Given total bank credit of Bt7.36 trillion in the financial system, banks get 85 per cent of this amount of money for lending from public deposits, 12 per cent from the shareholders' equity, and 3 per cent from interbank borrowings. Since 50 per cent of their credit has gone sour, there is a chance that they may face permanent damage to the tune of 25-30 per cent of the NPLs.

''The important question is who will bear the burden of this permanent loss of 25-30 per cent of the total bank lending incurred from the collapse of the financial bubble? For the banks' equity of 12 per cent will be completely written down to partially offset the losses from the NPLs. The answer is that the remaining balance from the damages will be shouldered by the Financial Institution Development Fund,'' the foreign banker said.

He said this means that in theory the banking system has to be nationalised and that the government needs to send in new management teams to run the banks.

But complete nationalisation of the banking system is not on Tarrin's agenda, otherwise he would not have worked out the Aug 14th package in the first place. The experience with nationalising six banks has shown that government teams are the worst choice for running the banks.

The question is whether Tarrin will compromise by softening some of the Aug 14th measures. From the bankers' perspective, the toughest measure in the Aug 14th Banking Restructuring Programme lies in a requirement for the banks seeking government's tier-1 capital support to set full provisionings for loan losses according to the year 2000 accounting standard. Another equally tough condition is a demand that the government will have a say in any change of management.

In the first instance, the shareholders might lose their shirts if they have to write down their capital to account for the bad debts on day one. Secondly, losing management control is the last thing they want to see. Dr Nimit Nonthapunthawat of Bangkok Bank said if the government allows the old management to continue for another two years after receiving the tier-1 capital on condition that they can turn around the banks, that will be a good compromise.

''For Chatri [Sophonpanich] to step down from Bangkok Bank, that might be possible. But asking him to further remove Chartsiri [Chatri's son] from the management, I don't think he will agree to that. And he will fight to the end,'' said a strategist of a major bank some time ago.

Some compromises?

Since the banking crisis has deepened beyond anybody's expectations, there might be pressure for the government to compromise on the reform package. George Morgan, who used to head a foreign brokerage house, said the Aug 14 reform package is not doing enough to address the problem of bank recapitalisation, particularly the weaker banks. In the meantime, banks only engage in cosmetic manoeuvers to help them survive by delaying the real reform necessary to put them back on a healthy path, he added.

He urged the authorities to tackle the NPL problem at its roots by nationalising [or carving out] the bad debts from the banks' books instead of letting the banks handle the debts by themselves. By doing so, the NPL problem can be handled more effectively.

Dr Thanong Bidaya, the president of Thai Military Bank, has called for the package to address the banks' deteriorating tier-1 capital rather than balancing it out with the tier-2 capital. ''If the banks agree to a hair-cut (reducing the debts) in debt restructuring or embark on new credit extension, the government -- instead of helping the banks to recapitalise with tier-2 capital -- should support the banks' tier 1 capital,'' he said.

Revising the Aug 14 reform package is necessary, Thanong added, because when it was formulated NPLs were hovering around 20-25 per cent, which would not have required banks to slash too deep into their core capital to compensate the losses. Now that the NPLs have risen to 40-50 per cent, the package must be revised to address the severity of the problem.

Thanong was not sure whether the IMF would go along with his suggestion, but he argued that since the NPLs are too high and the government-intervened bank still need to operate as ongoing concerns, the revisions to the package are worth a try.

A regulatory official looking after the banking reform package says if there are any revisions, it's principle that government money must not suffer losses must be compromised. There is a clause in the package that requires the government to buy the preferred shares from the banks in return for tier-1 capital support at a price that is not below the book value. In addition, when the government sells the preferred shares back to the banks, it must not incur losses.

''But since the conditions in some banks are very weak, the government may have to accept that its money will have to suffer some losses,'' said the official. He says it is cheaper for the government to intervene in the banks and keep them operating because by doing so it only has to aid the banks with the minimum capital adequacy ratio of 8 per cent. If the banks are wholly intervened, the government will have to be responsible for 100 per cent of the banks' lending portfolio, a burden it wants to avoid, he added.

The problems in the banking sector are so complex that no easy route can be found without pains or damage to public money. The problem is how to minimise the public costs and repair the banking system to its normal functioning.

The price tag of the public bail-out of the banking system appears to keep rising, from 30 per cent of the GDP to 35 per cent, according to S&P's latest estimate. Surprisingly, the government has not come forward to explain more clearly the impending burden that must be borne if the banking reform fails.



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