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Bank sale is a serious restructuring step

October 20, 2000

MR Chatu Mongol Sonakul set three major objectives to accomplish when he took over as governor of the Bank of Thailand in the middle of 1998. First, he would try to bring down interest rates without sacrificing exchange-rate stability. At that time, interest rates were hovering above 20 per cent. Second, he would aim to minimise the costs of restructuring the financial sector, so that public debts were more manageable. Third, he would reform the central bank and put it on a more independent course, targeting inflation as the hallmark of its monetary policy management.

Of all the tasks, restructuring the financial sector is, of course, the toughest nut to crack. On Tuesday, the Cabinet endorsed a Finance Ministry proposal to sell off the ailing Bangkok Metropolitan Bank to HSBC Holding NV, a unit of the UK-based banking giant. The terms and conditions of the privatisation were worked out largely by the Financial Institution Development Fund (FIDF), which controls almost 100 per cent of the local bank and of which Chatu Mongol is chairman. It followed more than a year of negotiations and hard work to produce a framework for the privatisation.

The FIDF and the Finance Ministry believe that the enormously complicated formula of the privatisation will cause the least damage in terms of tax-payers' money. Still, we are talking about a minimum damage to the state of a staggering Bt112 billion once HSBC has taken over Bangkok Metropolitan Bank. HSBC would be paying a nominal Bt36.619 billion to acquire about 75 per cent in Bangkok Metropolitan Bank. After a complicated workout in capital repayment, it will pay a net of Bt14.702 billion (about US$360 million) in this acquisition. Compared with HSBC's other acquisitions, this deal is rather small.

Ironically, while the FIDF said the authorities' decision to sell Bangkok Metropolitan Bank is an attempt to "save the nation", the members of the United Thai Club for National Liberation, led by prominent Thais, look at this deal as an act of "selling off the nation".

On Monday the nationalist club - led by Wan Muhamand Noor Matha, former president of the National Assembly, Dr Bichit Rattakul, former Bangkok governor, Dr Suchart Tyhada-Thamrongvech, an academic, and businessmen Amarin Khoman and Narong Chokwattana - bought an ad in the Mathichon daily newspaper. The club tried to woo public support for its dissent against the privatisation of the Thai bank. The tone of the ad, addressed directly to the management of HSBC, was also grave. The club threatened to sue HSBC if the deal was found to be irregular or susceptible to corruption. It claimed that the deal might "incur legal action with respect to the dishonest performance of duty and acts of bribery involving relevant officials as well".

There is a big information gap over the Bangkok Metropolitan deal between the FIDF and the nationalist club and also the public at large. But that is the nature of a financial deal. Most ordinary Thais would not understand the complicated financial formula designed to sweeten the deal to the satisfaction of both the seller and the buyer. HSBC is not stupid. It has a certain price in mind for its willingness to acquire the Thai bank. In this particular case, the price tag is Bt14.702 billion. For the seller, there is pressure to let go of the Bangkok Metropolitan Bank, which is losing money badly.

The longer it is kept in the authorities' hands, the more damage it will cause to the tax-payers. Nobody is going to buy the bank, including the club, if the state does not absorb a chunk of the bank's losses.

It is a tough decision that the authorities have to make. The nationalist club can criticise from afar but it lacks the information to establish a credible position. For the question is not limited to pricing only but also involves how Bangkok Metropolitan Bank can be kept viable once the transaction is completed. HSBC stands a better chance than other potential buyers of keeping Bangkok Metropolitan Bank as a continuing concern. The ultimate aim is to prevent Bangkok Metropolitan Bank from going bankrupt again and becoming a public burden. At this point we have to admit that Thai bankers lack the capability and resources to really turn around an ailing bank on the scale of Bangkok Metropolitan Bank.

The authorities let go a sigh of relief that at least they will be able to sell off one bank in these waning days of the Chuan government. Failure to privatise Bangkok Metropolitan Bank would have been seen as a major setback to Thailand's financial sector reform. It would also raise an open question as to how long the country can continue to hold up this bank and other ailing banks by providing full guarantees for public deposits and senior debts.

The same goes for another ailing bank, Siam City Bank. "The question is not about money, but it is about how we can prevent the bank from becoming a burden to the public again in the future," said an FIDF official.



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