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Ways to ease export financing woes


The export financing behind Thailand's Bt1.5 trillion in export revenue is running into a snag but there is means for improvement, explain Vatchara Charoonsantikul and Thanong Khanthong.

Thailand's Bt1.5 trillion in annual exports are supported by a web of financing, which has received a severe jolt from the financial crisis.

More attention needs to be paid to facilitating the financing of exports -- the key sector that will hopefully pull Thailand out of its crash. Thai exports are being financed by five methods.

The first financing method is through packing credit, a form of export subsidy. The Bank of Thailand has allocated about Bt45 billion in packing credit to boost exports. The Export and Import Bank of Thailand is handling the packing credit, offered at a subsidised interest rate of 5 per cent, on behalf of the BOT.

Under the scheme, the Exim Bank will pitch in 50 per cent of the credit to exporters while the remaining 50 per cent will be put up by the local commercial banks. The packing credit, blended between the BOT's subsidised rate and the commercial banks' cost of funds, will then be offered to exporters at a more competitive cost.

The present packing credit rate charged to exporters is 12 per cent but in fact, after taking into account the weightings of the Exim Bank's 50 per cent of the packing credit and its subsidised rate of 5 per cent, the commercial banks are charging exporters 19 per cent on their share of the credit.

According to one estimate, the Bt45-billion packing credit facility is helping to finance about Bt200 billion worth of Thailand's annual export bill.

The second method of export financing is through internal accounting between parent companies offshore and their affiliates in Thailand. The affiliates may purchase raw materials from the parent companies and export semi-finished or wholly-finished products back to the parent companies. Through internal accounting procedures, the transactions can be deducted without actual financial payments.

This financing method accounts for about 20 per cent of Thailand's total exports, or about Bt300 billion.

The third method of export financing is in the form of letters of credit (L/C) or trust receipts. The amount of money this involves is about Bt100 billion a year. Exporters use L/Cs to obtain credit from commercial banks. Normally, the credit comes with a maturity of 180 days. In several cases, the L/Cs can be rolled over once every three months.

Before the baht float on July 2, foreign or Bangkok International Banking Facility banks knocked on the doors of the largest Thai exporters offering short-term financing of one, two or three months maturity for their goods. This is another popular financing method among major exporters. The financing was denominated in US dollars to take advantage of its low interest rates.

However, the devaluation has effectively put an end to this financing method.

The last financing method for exports is through overdraft accounts, generally known as ODs. This credit line normally comes with a maturity of 60 or 90 days.

Following the baht depreciation, exporters no longer have access to the same credit facilities as before, even though the commercial banks may not have cut back their credit lines. The effective baht devaluation means exporters receive 50 per cent less money in dollar terms to finance their activities even though their credit lines in baht terms remain unchanged.

Another problem lies in the health of the local banks, all of which will need to raise massive new capital to meet the official capital adequacy requirement. Instead of taking risks during the economic downturn, banks now prefer to lend money in the repurchase market, which is yielding 23 per cent annually. The bonds are also risk-free because they are guaranteed by the central Bank of Thailand.

Interest rates have been kept high because the central bank is defending the baht fiercely, if not fruitlessly. If there is a way to bring down the repurchase rate to 18 to 19 per cent, the present top lending rate, commercial banks may be more inclined to lend to exporters.

If banks lend more money, they will also expand their risk assets. The financial crisis has forced the central bank to require commercial banks to maintain a capital adequacy ratio of at least 12 per cent. This means that if banks want to lend Bt100 to a customer, they must have at least Bt12 in hand as a cushion.

So, instead of expanding their assets, which would require them to increase their base, banks prefer to stand on the sidelines.

Their capital is also drying up due to a sharp rise in non-performing loans, which will require them to write-off bad debts or set aside significantly higher provisions.

Most of the bank lendings are considered risk assets, which require banks to set 100 per cent of the amount as provisions in case of defaults. Export credit with L/C back-up is weighted with 20 per cent in risk assets. Ironically, in the case of packing credit, the banks have to classify it as 100 per cent risk assets.

One banker suggested that the banking authorities look at the risk profile of local exporters and re-classify the risks associated with the packing credit so that commercial banks will have less burden when financing Thai exports. ''Whatever they do to promote exports they need full cooperation from the commercial banks because they are the major players,'' he said.



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