Thai Farmers cuts rate to historic low

Vatchara Charoonsantikul and Thanong Khanthong look at the implications of Thai Farmers Bank taking the lead to cut its prime rate to a historic low of 8.75 per cent.

May 25, 1999 -- After hurling some spicy remarks at the finance minister last Friday, Banthoon Lamsam, president of Thai Farmers Bank (TFB), yesterday almost sarcastically went his own way by cutting the TFB prime rate by 0.25 percentage points to 8.75 per cent.

This new minimum lending rate, effective from June 1, will be a record low in the history of Thai banking, which is now being flooded by several hundreds of billions of baht in excess liquidity. As a result, TFB will also maintain the narrowest nominal interest spread between lending and deposit rates in the banking industry. Its spread between savings and prime rates will be 4.25 per cent, compared to 3.75 per cent between its three-month deposit rate and the prime rate.

It is a solo move on the part of Banthoon, who is also chairman of the Thai Bankers' Association, to cut the prime rate without seeing eye to eye with his peers, most of whom are still reluctant to follow suit because of the burden of more than 40 per cent of non-performing loans (NPLs) on their books. This follows growing criticism that the banks are only interested in their survival by maintaining a wide spread -- at the expense of innocent depositors and good customers who service their debts regularly -- to offset their loss of interest income from NPLs.

Bangkok Bank (BBL), which is supposed to be the market leader, was anxious over TFB's lead and reacted immediately by following in its footsteps and announcing a cut of its prime rate by 0.25 percentage points to 9.25 per cent, also effective from June 1. As of now, BBL's prime rate is 9.50 per cent, equal to a second-tier bank such as the Bank of Asia.

The situation is even worse at the state-controlled banks, all of which are keeping their spreads wide as their NPLs average more than 60 per cent. Krung Thai Bank's prime rate is fixed at 9.75 per cent, compared to 11.75 per cent for both Siam City Bank and Bangkok Metropolitan Bank.

With Thai banks still charging their prime borrowers 5 per cent on top of the base savings rate of 4.5 per cent, MR Chatu Mongol Sonakul, the Bank of Thailand governor, informed the Cabinet yesterday about the spread in the system, which he said was rather wide and went against the trend in the economy. As a rule of thumb, Thai bank's spread should average 3-3.50 per cent, which leaves room for the lending rates to come down further by at least one full percentage point in the near future.

Since Thai banks are earning interest income from about 60 per cent of their loans -- given the 40 per cent NPLs -- they have found it necessary to keep the spread wide to subsidise the loss of income from their NPLs. Last week, Banthoon angrily pointed out that even at the present nominal spread, Thai banks with NPLs of 40 per cent were operating with a net interest gain of only 0.2 per cent. He argued that if the authorities would like the banks to narrow the spread further, they would be signalling a policy of killing off the banks altogether.

However, Banthoon did what he could and took the lead in cutting the prime rate to relieve some of the pressure. The implication is that it will force other banks to follow suit and accelerate debt restructuring with their clients. Moreover, lowering the prime rate will lead to lower borrowing rates for other less-prime customers.

Since most of the banks' prime customers have now restructured their NPLs, the banks are relying on second-tier customers to finance their survival. These second-tier customers are charged at the minimum retail rate (MRR), which is about 0.50 to 1 percentage point above the prime rate. Yet the banks feel free to charge these second-tier customers a maximum 2-4 percentage points above the MRR: 12 per cent at TFB, 13.25 per cent at BBL, 13.5 per cent at Bank of Asia, 13.5 at Siam Commercial Bank, and 13.75 per cent at Krung Thai Bank.

Penalty rates for late payments are charged at 15 per cent by TFB, 17.75 per cent by Bangkok Metropolitan Bank, 18 per cent by Krung Thai Bank, and 21 per cent by Radanasin Bank.

This shows that banks' good customers, which account for 60 per cent of their loans, are being charged at high borrowing rates to subsidise NPLs. There is no easy way out before the interest rate structure is restored, save for the banks to complete their recapitalisations and accelerate the debt restructuring process with their NPL customers.