UNLIKE the rescue of Siam Commercial Bank, regulators are faced with a more daunting task in putting together a package to bail out Nakornthon Bank.

Aside from size, there is a big difference between the two banks that are seeking public funds to help them recapitalise. While Siam Commercial Bank (1998 assets Bt716 billion) is still carrying a positive book value, Nakornthon Bank is suffering from a negative book value.

With a positive book value of about Bt36.25 a share as of 1998, Siam Commercial Bank has not been facing too many sleepless nights in trying to win the heart of the banking regulators over its Bt60 billion recapitalisation plan.

From the regulators' view, injecting public money into both Siam Commercial Bank and Nakornthon Bank during this time of banking distress carries enormous downside risks. To play it safe, the Aug 14 Banking Restructuring Programme stipulates that regulators will only bail out an ailing bank at a price below the book value. At least, if things take a turn for the worst for the bank the government will limit its losses.

In the case of Siam Commercial Bank, the regulators at the Financial Restructuring Advisory Committee, which supervises the Bt300-billion banking reform package, have given the go-ahead for Siam Commercial Bank to raise Bt30 billion in a global offering, which if successful will be equally matched by its contribution of Bt30 billion.

Initial response from Siam Commercial Bank's international roadshow in Asia, Europe and the United States has been very positive with expectations that it will be able to muster at least Bt20 a share for the global offering.

International institutional investors have reacted positively with Siam Commercial Bank's global offering because of the government's commitment to stand side by side with them.

With the government's injection of one unit (Bt30 billion) and investors' contribution of an equal unit (Bt30 billion), the name of the game is that the investors will stand to gain from both units after the bank has been turned around. For the government has agreed to a buy-back agreement under which it will unload its stocks on investors at its original cost plus some interest.

But in the case of Nakornthon Bank, regulators are facing a critical dilemma of either closing it down permanently or rescuing it so that it can continue to operate as an ongoing concern. Still, the task is made much more complicated by the fact that Nakornthon Bank is operating with a negative net-worth. With a negative net-worth it means that even after the bank sells off all of its assets it still cannot repay all of its liabilities.

The regulators have decided to bail out the bank and sell it off to a foreign partner rather than shutting it down altogether, which could create more problems later. Besides, the intervention in the likes of Bangkok Metropolitan Bank or Siam City Bank has taught a costly lesson that without a new partner to help turn them around, these government-controlled banks will continue to be sitting ducks, with endless costs to be born by public money down the road.

Let's assume that Nakornthon Bank's book value is minus Bt5 a share. At what price should the regulators or Standard Chartered Bank, which is the potential suitor, intervene in the bank? Even if they inject money into the bank at one satang a share, it is still too expensive, given the minus Bt5 a share in book value.

Regulations, as discussed above, do not permit the regulators to buy into an ailing bank at a price more than the book value. It is both a technical and practical problem.

Enter the Financial Institution Development Fund (FIDF), the Santa Claus of the Thai financial system. The regulators will try to circumvent this loophole of helping out a bank with a negative net-worth by using the money from the FIDF to fill up the black hole of about Bt10 billion first.

Nakornthon Bank is believed to carry problem loans of about Bt15 billion and only Bt5 billion has been set aside for provisions.

Certainly, there will be a big write-down of the bank's share capital to clean up the problem loans.

The bank's board of directors will meet next week to determine this sensitive issue of the size of the write-down. The matter will then be taken up at the shareholders meeting scheduled for early next month.

The regulators have not given specific write-down instructions to the Wanglee family, which has controlled the bank for the past 66 years, but will allow them to work it out at the shareholders meeting.

''It will be a give-and-take kind of arrangement by which the bank will have to try to win support from the shareholders,'' says a working official.

Overall, some Bt20 billion will be needed to put Nakornthon Bank back on its feet. Of this amount, Bt13 billion will come from both the FIDF and from the banking restructuring package.

At least Bt10 billion will be needed to put Nakornthon Bank back at zero per cent tier-1 capital, which, however, must be maintained at 4.25 per cent of the total risk assets to satisfy banking regulations.

Standard Chartered Bank will step in by injecting a fresh Bt7 billion into the bank to turn it into a 69 per cent majority shareholder, who will have decisive management control.

By doing so, the government will be carving out the bad debts for Standard Chartered Bank, which will be limited in its investment or potential loss in Nakornthon Bank at Bt7 billion and enjoy a full presence and nationwide network of 69 branches.

Since most of the government money will be used to write off the bad debts, it will emerge as only a 20 per cent shareholder. The Wanglee family and other minority shareholders will keep about 11 per cent because they will be participating in a doubling of the share capital of about Bt2 billion.

The windfall benefit will fall on Standard Chartered Bank, which -- unlike the Radanasin Bank which has absorbed the Laem Thong Bank and immediately become a bad bank -- will have a clean bank to run on day one.

Since the government will be pitching in Bt13 billion into the bank, how can it make sure it will get some of the money back?

There will be three ways that it might recover its money. First, the bank, under the Standard Chartered Bank, will try to work out the bad debts and turn them into good debts, a process that will take at least five years. This prospect depends on a turnaround of the Thai economy.

Second, Nakornthon Bank will allocate a certain amount of its stocks to the government, so that it will benefit from the upside gains when the bank recovers. The bank is projected to continue to post losses this year and next and not until the year 2001 will it start to make profits of about Bt800 million.

Third, warrants -- or a right to buy the bank's stock at a certain price and certain time in the future -- will also be offered to the government, reportedly to the tune of Bt800 million.

With this formula being worked out, Thai Military Bank, which is testing the waters with the government's tier-1 capital support, might be tempted to copy this.

After all, it is just public money.