March 17, 1999 -- Nationalising the banks' non-performing loans might be a good option to deal with the banking distress, but it will undermine the entire Aug 14 banking restructuring programme, Thanong Khanthong and Vatchara Charoonsantikul argue.

DR SUPACHAI Panitchpakdi, the deputy prime minister and commerce minister, has attempted to hijack the Aug 14, 1998, banking restructuring programme. He has come up with a better-late-than-never proposal to partially nationalise the banking system's non-performing loans (NPLs), which have climbed to Bt2.73 trillion, or about 46 per cent of the total loans. His strategy is to quickly restore the balance sheets of the banks.

Supachai's aim might not look too ambitious, judging by the size of the government's intervention. For the government will use its bonds, instead of cash, to buy 10 per cent (about Bt273 billion) of the banks' top-quality NPLs. This will allow the banks some breathing space while they embark on the simultaneous step of recapitalisation.

But the more important implication from this move is that it will not only send mixed signals to the financial markets but will also undermine the credibility of the Aug 14 banking restructuring programme. Tarrin Nimmanahaeminda, the finance minister, considers the banking reform package a hallmark of the government's financial and economic reform. If Supachai's proposal is to be adopted, it will give Tarrin sleepless nights for it will almost turn his banking reform package upside down.

Several critics favour Supachai's idea, however. Dhanin Chearavanont, the head of the Charoen Pokphand Group, has gone so far as to suggest that the government buy all of the banks' NPLs at a 50 per cent discount since it still has the credit to do so. He says in the absence of government intervention, the assets of the banks will only deteriorate and eventually may be liquidated at only 10 per cent from their original value. In the end, he warns, the restructuring cost of the banking system, which will be borne by the government or the tax-payers anyway, will be even more expensive.

An economist, who preferred to remain anonymous, said Supachai's proposal is the quickest way to convert the banks' bad assets into good assets because the NPLs will be taken off the balance sheets. ''It might not be too late to implement this measure,'' he said.

Nationalising the NPLs featured prominently in the debate ahead of Tarrin's formation of the Aug 14 banking reform programme. Chile, which suffered a financial crisis in the early 1980s, employed this method of carving out the banks' NPLs in return for the government's 10-year-zero-coupon notes. This gave the banks a 10-year period in which to write off loans and avoid costly losses that would have eroded bank capital. But the banks had obligations to buy back the NPLs when their conditions improved over the period.

Tarrin turned down this Chile model of dealing with the NPLs, preferring the banks to deal with their own NPLs while mustering direct support -- with punitive conditions of capital write-down and management change -- from the government in their recapitalisation. The Chile model bails out the shareholders of the banks without punitive measures, something that runs against the philosophy of the International Monetary Fund support programme.

In his recent report presented to the World Economic Forum, Don Hanna of Goldman Sachs also called for authorities in Asian countries to deal with the banking distress decisively by accelerating recapitalisation and extending the NPL carve-out. ''With real activity and real credit growth negative, the key element of financial restructuring is restarting credit, and thereby growth,'' he said.