Little contrast in debt plans

October 4, 2000

THE Democrat Party's plan to selectively purchase bad loans in the banking system would cost taxpayers Bt302 billion, while the Thai Rak Thai Party's plan for a full-scale buyout would cost Bt485 billion, according to a study by SG Securities Research.

Both parties have begun to campaign for the establishment of a national asset-management company to handle the huge amount of non-performing loans in the banking system.

The Democrats, particularly Finance Minister Tarrin Nimmanahaeminda, have been reluctant to use public money to buy the bad loans, but have begun to soften their stance.

The amount of non-performing loans in the banking system is falling slowly, and stands now at about Bt1.5 trillion, or 31.24 per cent of total lending.

However, after Krung Thai Bank transfers Bt524 billion in bad loans into an asset-management company financed by the Financial Institutions Development Fund, the bad debt in the system will fall to 21 per cent of total lending.

Deputy Prime Minister Supachai Panitchpakdi has indicated that the Democrats would use a national asset-management company as a supplementary measure if the party were returned to power after the general election.

The Thai Rak Thai has said it would be more aggressive, proposing a wholesale buyout of bad loans to rid the system of the problem once and for all, and to allow the economy to move forward again.

SG Securities Research released a report on Sunday that said the two parties' approaches are not significantly different. Either plan would quickly reduce bad loans in the banking system and provide a much-needed boost to the economy, the report said.

Under the Democrats' plan, a national asset-management company would buy bad loans from the asset-management companies formed by individual banks. Based on the purchase of bad loans at par value, the total amount held by private asset-management companies should stand at Bt755 billion as of the end of this year, after banks' provisional write-offs.

The national asset-management company would purchase the bad loans by issuing government bonds to the banks. Any losses would be incurred by the government.

Based on the assumption that the government would shoulder losses of about 40 per cent, the SG Securities Research report estimated that the Democrats' plan would cost the public Bt302 billion - or about 6 per cent of the gross domestic product.

The report estimated that the Thai Rak Thai plan to buy the entire amount of bad loans in the system at par value - about Bt1.21 trillion as of end of this year - would cost Bt485 billion, also based on losses of 40 per cent. This would amount to 7 to 10 per cent of the gross domestic product.

The report said the Democrats' plan would be more appropriate and easier to implement, given that the government could simply buy the bad loans from the private asset-management companies. This would also relieve the burden on commercial banks, which could focus on lending money to cash-starved corporations once again.

However, some have argued against forming a national asset-management company, fearing that it would further burden the government and create moral hazards for both debtors and creditors.

At the World Bank-IMF meeting in Prague last week, Deputy Prime Minister Pisit Lee-ahtam said the government would not use public money to purchase bad loans.

Noted economist Dr Ammar Siamwalla also argued against a national asset-management company in an article published yesterday in The Nation. Ammar said the NPLs need to be reduced at the macro level, but corporations in the non-financial sector would suffer in their financial and business restructuring.

If a national asset-management company cleaned up the bad loans, banks would not necessarily begin lending money again immediately because of the corporate sector's high level of indebtedness, Ammar said.

BY THANONG KHANTHONG