Let govt absorb bad loans to spur growth

THERE is a growing likelihood of a systemic nationalisation of Thailand’s nonperforming loans. Over the past two weeks, commercial bankers met twice with finance and banking authorities to discuss the possibility of utilising the Bt240 billion left over from the August 14 Banking Restructuring Programme (1998).

Most bankers like the idea, which was initiated by Finance Minister Tarrin Nimmanahaeminda. Placing problem debts into the Asset Management Corporation (AMC) with financing support from the August 14 Banking Restructuring Programme would clean up the banks’ balance sheets allowing them to focus on providing new credit.

Obviously, Tarrin would like to lower the level of nonperforming loans (NPLs) as quickly as possible. January’s figures indicated that Thailand’s NPLs continued to fall marginally, down about 0.3 per cent from the month before. NPLs totalled Bt2.087 trillion, or 38.7 per cent of the Bt5.38 trillion total outstanding loans.

If NPLs are not reduced more substantially they will slow the economy’s recovery.

If adopted, the systemic nationalisation of NPLs will amount to turning the August 14 Banking Restructuring Programme upside down. This plan, formulated in 1998 at the height of the banking crisis, aimed to raise the capital of banks saddled by NPLs and restrained by stringent provisioning requirements.

At that time, there was a debate as to whether the government should bail out the banking system by injecting capital into banks or by buying their problem loans outright. Tarrin decided on a middle path, nationalising some banks and finance companies while strengthening the more viable ones by injecting new capital. He thought that boosting their capital -- while letting them manage their own NPLs -- would help them return to normal.

Nationalising NPLs was not a policy option at that time. Chile, in the 1980s, found success with this method. Some other crisishit countries in Asia, including South Korea, also nationalised their banks’ debts to accelerate the sector’s restructuring.

In Thailand at that time, it was not easy to nationalise problem debts. The big question was what were the appropriate prices for transferring NPLs into a governmentrun asset management corporation. Appraising assets during the sharp economic downturn was a tough job. Another problem was how to prevent the banks from dumping all their garbage into the government’s can.

Tarrin decided on the marketoriented guideline that banks, while getting state assistance to recapitalise, should deal with their own NPLs by establishing their own asset management corporations. The International Monetary Fund also favoured this policy.

But the lack of a credible bankruptcy framework, which was not put in place until the first quarter of last year, delayed the corporate debtrestructuring process. It also took time for the Finance Ministry to revise the tax system to provide tax credits and other exemptions as incentives for banks to work out their problem loans.

Siam Commercial Bank, Tisco Finance and SG Asia are among the financial institutions that have used the government’s tier1 capital support to deal with a substantial number of their NPLs. Thai Military Bank is now following suit. However, most other private banks are reluctant to tap the money in the programme because they fear losing management control.

Yet, revising the August 14 Banking Restructuring Programme would require a strong and united endorsement from the Cabinet. It would be easy to criticise the government for buying the problem debts of the rich, while most Thais struggle with the economic crisis.

However, NPLs are a national problem that has to be dealt with decisively. Events have shown that tackling them has become a tedious process, forcing authorities to rethink their policies. It is not too late to nationalise the remaining problem loans, but the question is how to do it.

The conditions must be laid out clearly for injecting state capital into the AMCs that would be jointly run by the banks and authorities. The system must be fair to all financial institutions involved. In this regard, Thai Farmers Bank’s AMC has proved to be a good model.

However, from a macroeconomic perspective, the low interest rates will eventually facilitate corporate debt restructuring. "An environment of continued low interest rates and improved economic growth prospects raises the likelihood of successfully cutting the debt overhang holding back further growth," said a March 6 report from Salomon Smith Barney.

BY THANONG KHANTHONG