Bank authorities must act decisively, says Dresdner chief

May 15, 2000

THE outgoing general manager of Dresdner Bank AG has urged the country's banking authorities to resort to a more decisive way to deal with the high level of non-performing loans in the banking sector -- by going back to a good-bank/bad-bank approach.

Since the outset of the banking crisis, Vichai Punpocha, who heads back to Frankfurt before the end of this month, has been campaigning for the good-bank/bad-bank concept to deal with NPLs.

This approach, if implemented artfully, will carve out the banks' problem loans, leaving them with a clean balance sheet overnight, he maintains.

"How can we tackle the stock-market slump when we do not have any star performers? In the past the star performers of the stock exchange were the banks and the finance companies. Now they are saddled with high NPLs. The credit system is paralysed," Vichai said.

"More decisive measures must be implemented to clean up the NPLs, so that the banks can become star performers again," he said.

So far the Thai authorities have opted for a multiple approach in coping with the banking crisis and the large number of NPLs.

They began by closing down the weak financial institutions and then auctioning off their assets through the Financial Sector Restructuring Authority.

This was followed by an intervention in the other weak banks before trying to resell them to the foreign banks.

For the remaining private banks, a government-sponsored August 14 Banking Restructuring Programme was established in 1998 to assist them with recapitalisation.

Then the authorities moved on to put in place a market-mediated mechanism, or asset-management corporations, with tax incentives to help the sagging banks tackle their NPLs.

For all the tedious efforts, the progress of bringing down the NPLs has been slow, so slow that investors have begun to lose confidence in the Thai financial sector.

NPLs now stand at 37 per cent of total loans.

Much worse, there are new NPLs and old NPLs from the restructured debts popping up to the tune of Bt200 billion to Bt300 billion. A recent heavy sell-off of Thai equities to a five-month low could also be attributed to disappointment on the part of the institutional investors with the progress of the financial sector's reform and the persistently high level of NPLs.

Vichai said the August 14 Banking Restructuring Programme, established in 1998 as a state-assisted recapitalisation scheme for the banks, was good in that it provided a cushion for the banks that needed state money for capital increases but their NPLs had to be resolved in a more clear-cut way by separating their good assets from their bad assets.

Here is his formula:

If a bank loses Bt40 from its total lending of Bt100, it means it is saddled with 40 per cent NPLs.

It can then not get back on its feet because incomes from the 60 per cent of performing loans cannot offset the bleeding from the 40 per cent of NPLs.

The way to do it is to split its operation into two, by setting up a good bank with assets of Bt60 and a bad bank with assets of Bt40.

The shareholders will have to take a hit, but they will still proportionately hold shares in the good bank and the bad bank, which will be transformed into an asset-management corporation (AMC). The AMC will be a completely separate entity. Vichai says the good bank, whose assets shrink significantly from the original size, will be operating from day one with a clean balance sheet.

As a virgin bank, it can begin lending to businesses without having to worry about the NPLs or provisioning for loan losses. "If each of the good banks in the system is sold to a strategic partnersor foreign bank at 25 per cent, they will once again become very attractive. The strategic partners must be selected from a broad range and on the basis of their different banking strengths, so that Thailand gets the best from the world," Vichai says.

As for the bad bank, an insolvency practitioner will be appointed to trouble-shoot its bad assets.

The insolvency practitioner will know when to call in the property valuers or the legal officers or to take cases to court. If during a period of say five or 10 years, the problem loans in the bad bank can be recovered by 50 per cent -- or Bt20 in this particular case -- the shareholders will get half of their money back.

This will prevent a Financial Sector Restructuring Authority-style of auctioning that leads to domestic asset price collapse.

Reserves against loan losses from the good bank, which has downsized its operation, can then be transferred proportionately to the bad bank.

By doing so, the government, or the Financial Institution Development Fund, will cost less in compensating the bad bank's losses. And that is because it is not assuming responsibility for the entire risk of the bank in its original size, as is happening now with Bangkok Metropolitan Bank or Siam City Bank.

BY THANONG KHANTHONG