SPECIAL vehicle funds should be set up by banks to tackle the non-performing loans in their portfolios.

This will not only draw investment interest from overseas investors but will represent one of the most viable ways in dealing with the banking crisis, a debt restructuring specialist at Union Bank of Switzerland said.

Charles Schlumberger, the Zurich-based lawyer who presented his Swiss experience in dealing with the banking crisis at a seminar in Bangkok last week, said there was a massive amount of money in the US and Europe ready to take risks by buying into the restructured debts of Thai banks once there is adequate protection in the legal and bankruptcy procedures.

''The important thing is that you need to have protection for investors putting new money into restructured assets so that if anything goes wrong they should have priority, among the creditors, in reclaiming their money. It will also require you to have good bankruptcy and foreclosure laws to deal with the process,'' he said.

During this financial distress, the bankers' first order of business is to take a hard look at their loan portfolios and categorise them accordingly. Schlumberger suggested that the portfolios are categorised into bad loans, doubtful loans, sub-standard loans, ''strategic NPLs'', and performing loans.

''For the state banks in particular, losses or bad loans cannot be subsidised. They must be liquidated,'' Schlumberger said.

Doubtful loans are loans that need restructuring and liquidity, while sub-standard loans are ones that only need liquidity. Strategic NPLs are good loans that decide voluntarily to stop paying interest after seeing that most of the borrowers are not servicing their debts.

Schlumberger said apart from the performing loans, the rest are problem loans that must be dealt with systematically with a clear workout programme. If these loans can be lifted out from the banks' portfolios and placed in special vehicle funds, they will attract interest from international investors who are willing to take risks in good deals if the legal environment is favourable, he added.

Now banks are walking a tight rope as they find it extremely difficult to raise new funds to recapitalise because of their murky books; but if the bad loans are taken out and structured attractively for foreign investors banks will be in a much better financial shape.

Schlumberger said Thai authorities and bankers were keen to recognise the important and urgent need of corporate debt restructuring, without which the Thai economy would continue to slump without a chance of recovery. He understood that the process will be painful and will take at least three to four years but that it is a process a more matured Thailand will have to go through if it wants to emerge as a stronger economy.

''This country has a lot of potential. You have people who are willing to work hard and create wealth but you need to create the right system now. In Switzerland, fortunately we have good bankruptcy laws and procedure. It only take three to six months to foreclose an asset,'' he said.

Vichai Punphocha, the general manager of Dresdner Bank, also asserted that businesses no longer viable must be allowed to go under otherwise the corporate restructuring process will increase unnecessary burdens on banks already in distress.

''If a company is insolvent and no longer competitive we try to restructure its debts, we will not solve any problems because the company will not be able to sell its goods and it will continue to carry the bad debts,'' he said.

Vichai said the most important thing the government needs to do now is to restructure the whole economy and prepare the country with a new launch pad to take off again. ''Corporate restructuring is only a tool to improve liquidity in the system but it is not a long-term solution,'' he said.

''Now, with the interest rates coming down, banks are still hesitating to extend new loans because they are afraid they might create more non-performing loans. If this is the case, we must admit that Thailand is facing an insolvent problem not a liquidity problem.''