Dousing 'fire' from the top

August 25, 1999: Vatchara Charoonsantikul and Thanong Khanthong look at the unfolding Krung Thai Bank saga after a purge of its board.

Heads at the Krung Thai Bank (KTB) rolled en masse yesterday after Finance Minister Tarrin Nimmanahaeminda, exercising his absolute power through the Financial Institution Development Fund (FIDF), moved decisively to purge all the board members, with the exception of KTB president Singh Tangtaswas.

By cleaning up the board, Tarrin hoped to put out the ''fire'' at KTB before it threatened to burn down the Bt1-trillion organisation. More importantly, the move was specifically aimed at Mechai Viravaidya, the embattled chairman, who had to be completely silenced before his public discourses further destroyed the fragile bank.

Following Mechai to the door were Vicharat Vichit-Vadakan, Charnchai Charuvat, Chaipatr Srivisarnvacha, Penwan Thongdeetae, Sirin Nimmanahaeminda, Suparut Kawatkul, Kamolchai Pattarodom, Kittipong Urapeepatanapong and Dusit Tengniyom.

It was on Monday evening that Singh used fire as the analogy to describe the precarious situation of the bank. He said, ''I had known that I would be confronted with grave problems at the bank when I first accepted the job about a month ago, but I had never expected that the bank would be exposed to the heat until it caught on fire.''

Over the past two weeks, KTB has indeed literally caught fire. At a Senate panel, at which Mechai was testifying, a sensitive PricewaterhouseCoopers partial audit report of the bank was leaked. The report indicated that bad loans at the institution could reach 84 per cent. There followed widespread interpretations of this report, questioning the weakness of the bank's lending practices and the way it was managed under former president Sirin Nimmanahaeminda, the younger brother of the Finance Minister.

The KTB scandals quickly spilled over into the political arena, with the opposition criticising the bank in the hope of using it as a sacrificial lamb to bring down the government. KTB is a much more vulnerable target than Bangchak Petroleum Plc or other corporations due to its delicate status as a financial institution. The bank involves public depositors, customers, correspondent banks and creditors -- all operating at the heart of the economy. If the opposition could prove that Tarrin had failed to tackle the problems at the state-controlled bank, they could further generalise about his overall failure to turn the economy around.

Sensing the danger and a potential public backlash, Prime Minister Chuan Leekpai and Tarrin promised to investigate the KTB without bias, even though it might touch his brother Sirin. They were angry at Mechai, who was blamed for kicking off the controversy. Tarrin had threatened to remove Mechai, but his arm-wrestling with Bank of Thailand governor M R Chatu Mongol Sonakul, who had brought Mechai to the bank, produced a stalemate. Tarrin made a mistake in not taking a decisive stance against Mechai.

For all his skills in winning over public opinion, Mechai, a community development specialist, proved to be a complete disaster in the business of banking. Over the past year, Mechai was anything but controversial. The more he talked, the more he created confusion and the board he chaired became a lame duck. The board and the bank's management did not enjoy the good working relationship necessary to turn the bank around and tackle its mountain of bad debt.

KTB was notorious when it came to debt-restructuring talks with its debtors. It just would not make any decisions, hence becoming a big part of the problem itself rather than part of the solution to the country's economic woes.

Three tactical steps needed to be taken if Tarrin hoped to bring peace back to KTB. First, he had to alleviate the political pressure and justify his move to clean up the bank once and for all. On Sunday, he announced the formation of an independent panel, mandated to investigate the loan portfolio of the bank and its past lending practices. The appointment of this panel would lay the groundwork for him to justify his dramatic action against the bank's board, without having to worry about discriminatory practices since the panel would probe the role of Sirin as well.

The names of the independent panel were announced yesterday, with Kamchorn Sathirakul, a former Bank of Thailand governor, as chairman. Other members include Phenwan Thongdetae, Pornthip Jala, Sethchai Srivirakul and Samphan Limtrakul.

Second, the KTB board had to be be purged so that the bank may reclaim its credibility through new appointments. By Monday, the path was cleared for Tarrin to move into the bank, exercising his power as guardian of state-owned enterprises, of which KTB is a member. Mechai, who earlier showed his stubbornness by not giving in, was still pondering how to bow out gracefully. He was thinking of siding with the KTB labour union to fight back. But it did not work out. Time was ticking away too fast for Mechai.

Indeed, Mechai should have resigned when the PricewaterhouseCoopers report was leaked two weeks ago. It might not be possible to get to the person who had leaked the informal audit report, but as chairman, Mechai had to take responsibility for the leak, which undermined confidence in the bank and the financial system as a whole. He also missed another chance last week when the Prime Minister summoned him to Government House and blamed him for throwing the bank toward the centre of the controversy.

The game plan was carefully crafted to purge Mechai and the entire board. Supachai Phisitvanich, the permanent secretary at the Finance Ministry, came out to say that the bank's chairman and board members would be judged by their ability to improve the bank's performance, expand its credit, and bring down the level of bad debts. Chaktip Nitibhon, manager of the FIDF, which holds 92 per cent in the bank, brought forward the FIDF meeting by one day to yesterday morning so that it could vote on the KTB board issue. The meeting was arranged to take place before the KTB board meeting in the afternoon. Chaktip was perfectly executing the Finance Minister's instructions.

Mechai could have sensed the end game. Some board members got the impression that the FIDF might decide to expand the KTB board from 10 to 15 and in the process a new chairman would be picked. Mechai tendered his resignation, along with Charnchai, Vicharat, Chaipatr, Kamolchai and Kittipong. The resignations of Mechai, Charnchai, Vicharat and Chaipatr were to be effective from yesterday, with those of Kamolchai and Kittipong taking effect today. This would have allowed the board to continue to function with a sufficient quorum.

Yesterday, the board of the FIDF seemingly ignored the resignations and voted to purge all the board members, except Singh. ''We decided to remove all the board members because they could not work with the management. Besides, there was a clear friction within the bank,'' said finance permanent secretary Supachai.

After this dramatic clean-up, the next tactical step for Tarrin will be to rebuild confidence. The bank's balance sheets must be spread open to full public view. With bad debts of about Bt600-Bt700 billion, including those of the First Bangkok City Bank, KTB must present a clear plan as to how it will deal with these problem loans. It has to spell out how much more in provision is needed to cover them. Is the Bt108 billion in additional capital enough to keep the bank moving on? If it is not enough, how much is needed? Virabongsa Ramangkura, the chairman of the Senate Committee on Financial, Fiscal and Banking, said the bank would need another Bt150 billion to cover its bad loans. Most importantly, where will the money come from?

These questions must be properly addressed, otherwise there could yet be a Part II to the KTB saga