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Commercial banks still to run down assets

July 31, 1999 -- UNLIKE finance companies, Thai commercial banks have yet to run down their assets to clean up their balance sheets, although bad loans have continued to weigh down their books over the past two years of financial crisis.

The statistics, as compiled by Financial Sector Restructuring Authority (FRA) chairman Amaret Sila-on, say it all.

Between December 1996 and June 1999, the number of finance companies shrank from 91 to 24. Of these, 56 were permanently shut down and their assets of more than Bt800 billion auctioned off by the FRA, 13 finance and securities companies have been merged, and just one -- Ratanatun Finance Co Ltd, which is a subsidiary of Radanasin Bank -- was created.

As a result of the collapse in the finance sector, the combined assets of the finance companies sank by more than a third, from Bt1.76 trillion in December 1996 to Bt502.74 billion as of December 1998.

The situation in the banking sector is quite different. In the corresponding period, the number of banks fell only slightly from 15 to 13. Only the Bangkok Bank of Commerce was closed down permanently, while two were merged, four were subject to intervention, and one -- Radanasin Bank -- was created anew.

Interestingly, the assets of the banking sector actually increased between December 1996 and March 1999, from Bt5.07 trillion to Bt5.67 trillion. This implies that banks, in spite of the 47 per cent non-performing loans (NPLs) in their lending portfolios, are still holding bad loans close to their chest.

''What these figures tell you is that the banking sector has yet to undergo a restructuring,'' said Amaret.

In the case of the finance company sector, the Financial Institution Development Fund, the lender of last resort, is in the process of issuing Bt500 billion to cover the black hole created by the collapse of the 56 finance companies.

The damage in the banking sector, which is running about Bt2.7 trillion in NPLs in its books, has yet to be accounted for, at least systematically.

''If you take the words of Khun Banthoon [Lamsam, president of Thai Farmers Bank], we can roughly estimate that a third of our NPLs, presuming that they reach Bt3 trillion, are irrecoverable. This already amounts to Bt1 trillion. And who's going to pay for this mess, if not the public's money,'' said a banking executive working for a US bank in Bangkok.

Amaret said that banks had been making very little effort over the past year or so to deal with NPLs through debt restructuring. ''The debt restructuring we have heard about so far is not really restructuring. In fact, they are simply debt rescheduling. And the problems will come back three or six months from now,'' he added.

Instead of undertaking debt restructuring, which will help reduce the pressure on their already weak capital base, Thai banks have elected to embark on a recapitalisation course. But the question is: to what extent can they continue to recapitalise and reschedule their NPLs when almost all of the banks are operating with a negative margin?

The negative margin can be explained by the fact that banks now have higher expenses than income, due to the abnormally high level of bad loans in their books.

In addition, banks are hoarding new savings at an annual rate of about 10 per cent because people do not know where else to put their money. At the same time, lending is falling by 4 per cent.

This mismatch in savings and lending on the back of the high NPL level cannot continue forever.

Amaret emphasised that the key issue for the banks was to accomplish debt restructuring. But this painful process, which will require banks to liquidate bad loans or take a hit or a haircut for the restructured loans, calls for a direct addressing of the problem of banking distress in general.

The banks so far have been reluctant to restructure the loans because doing so will directly eat up their capital. So they have decided to shift the problem into the future by rescheduling the debts.

''The banks know that they are in deep water, but they somehow hope that a miracle will happen,'' said an investment analyst at a top securities company.

Despite interest rates falling to historic low levels and ample liquidity, the system is still suffering from a credit crunch. Amaret said this was happening because the banks do not lend out their money for fear of adding more bad loans, hence denying capital to even good companies.

Although the government has enlarged its fiscal expansionary programme to help boost aggregate demand, the fundamental problem in recovering the fragile economy lies in unlocking the bad debts in the system so that companies can borrow to do business.




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