11 Thailand

Omotunde Johnson, Jean-Marc Destresse, Nicholas Roberts, Mark Swinburne, Tonny Lybek, and Richard Abrams
Published Date:
March 1998
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Thailand is a middle-income developing country with a population of 59.4 million. Over the past decade it has grown rapidly in real terms, with GDP per capita of about $2,400 in 1994.

Overview of the Economic and Financial System

Thailand’s financial sector was heavily regulated until the late 1980s, when pressures stemming from rapid industrialization, growth, and the development of new technologies led to a major liberalization effort (see Hataiseree, 1991). In 1989 a comprehensive reform plan was developed to enhance the competitiveness, flexibility, and efficiency of the financial system. The first three-year financial development plan, which covered 1990-92, included the deregulation and liberalization of interest rates, the improved supervision of the financial system, the development of new financial instruments and services, and the drafting of a program for payment system development. The goal of the second three-year plan, for 1993-95, was to make Bangkok an international financial center and to extend financial services to rural areas (see Tivakul and Pongpany, 1993). In the coming years, further measures to improve the efficiency of payment services, including a real-time DVP system for government securities, are planned.

The Bank of Thailand (BOT) initiated a plan for reforming domestic payment systems in early 1991. The plan included introducing a large-value RTGS system (BAHTNET), reducing the clearing time for checks (CHEQUECLEAR), and introducing a small-value interbank electronic transfer system (MEDIACLEAR) (see Watanagase, 1994). BAHTNET began its operations in May 1995. Its operations include interbank transfers, current account inquiries, bilateral communication, general broadcast, and third-party transactions. Until the introduction of BAHTNET, large-value payments had generally been made by using checks drawn on the BOT with same-day settlement or cashier checks on the commercial banks with one- or usually two-day settlement.

The CHEQUECLEAR program is for the Bangkok metropolitan area. As part of the program, automated check sorting (ACS) was introduced in February 1995, and full migration was achieved by the end of October 1995. An electronic check-clearing system (ECS) was set to be implemented in July 1996. In addition, steps to improve interprovincial check-clearing systems are scheduled for 1996–98.

Direct deposit of payroll checks and the automatic payment of recurrent bills have been possible for some time, if payer and payee have accounts at the same bank. However, the BOT is now developing MEDIACLEAR, which is a system similar to automated clearinghouses (ACHs) in the United States, which will allow small-value bulk interbank transfers. The system is expected to be operational a few months after the transition to the ECS.

Banking Structure

In Thailand, at the end of 1995, there were 15 domestic commercial banks with 2,957 branches, of which almost half were in the Bangkok metropolitan area (see Kittisrikangwan, 1995). Thailand also had a few specialized government banks, 14 foreign banks, and 91 finance companies mainly located in the Bangkok metropolitan area. There were also 20 foreign banks with restricted licenses and 45 representative offices of foreign banks. Commercial banks obtained about 70 percent of their funds from deposits. Finance companies were not allowed to take deposits but could fund themselves by issuing promissory notes.

Offshore banking was established in March 1993 under the Bangkok International Banking Facility (BIBF), to facilitate the financing of the current account deficit and to promote Bangkok as an international financial center. At the end of 1995, 46 offshore licenses had been issued to the 15 domestic banks, 11 foreign banks with branches in Thailand, and 20 financial institutions from overseas. BIBF credit to domestic businesses accounted for 15.8 percent of total domestic credit extended by the banking system at the end of 1995.

In early 1995, Provincial International Banking Facilities (PIBFs) were instituted, allowing offshore banking in areas outside Bangkok; PIBFs can extend credit in both baht and foreign currencies, while BIBF can extend credit only in foreign currencies. Thirty-seven PIBF licenses had been granted by mid-1996.

For a number of reasons, Thailand’s economic situation deteriorated in recent years, and serious weaknesses emerged in the financial system, particularly—but not exclusively—in finance companies. In the second half of 1997, as part of a comprehensive reform program, the authorities put in place structural measures to strengthen the financial system. The measures include separation, suspension, and restructuring of unviable institutions; requiring all remaining financial institutions to strengthen their capital base as quickly as feasible; and taking steps to improve banking supervision.

Money and Securities Market

The Thai money market consists mainly of four submarkets: interbank loan, foreign exchange swap, repurchase market, and bill of exchange. The most important submarket is the interbank money market, which involves lending between banks. Most transactions are for overnight maturity; transactions for longer periods are at call, but these transactions are insignificant. The interest rate, called the interbank rate, is a key indicator of the liquidity in the market.

The foreign exchange swap market is the second-largest market segment after the interbank market and is one of the fastest-growing markets. The rapid growth of the swap was due to the positive interest rate differentials between domestic and foreign interest rates in an environment of a relatively stable exchange rate and a general tendency toward more deregulation of foreign exchange transactions in order to allow freer mobility of capital across borders. Banks have largely used this instrument as a means of adjusting their liquidity, with more than 50 percent of transactions being concluded with counterparties located abroad.

Another important submarket is the repurchase market. It enables BOT to influence the development of short-term liquidity and interest rates—in turn serving as a reference for other money market transactions.

The bond market is at present in an early stage of development. Some B 50 billion of debentures were issued by local corporations in 1995. As regards the government bond market, the outstanding amount declined successively from a peak of B 235 billion in 1987 to B 43 billion at end of 1995. This is because no new government bonds have been issued since 1990 because of the continued budgetary surplus. The outstanding amount of state enterprise bonds, in contrast, has increased sharply since 1990.

The equity market is relatively well-developed. In 1991, computerized trading was introduced at the Stock Exchange of Thailand, and in 1992 a system was introduced to record the ownership of securities and store these data electronically.

Monetization of the Economy

The financial deepening of the economy has increased as M2 as a percentage of GDP has risen from 38 percent in 1980 to 79.5 percent in 1995. Thus, although currency as a percentage of GDP has been almost constant at 8 percent, during the same period, currency as a percentage of M2 halved to 10 percent of GDP.

Communication, Transportation Systems, and Geographical Factors

Interregional interbank transfers take considerable time for final settlement because of the courier systems used to move the paper-based instruments. The clearing and settlement of checks deposited in a branch of one bank in a province and payable by a branch of another bank located in a different province (interprovincial checks) is slow, taking 7 to 14 days or even longer for banks to provide good funds to customers. However, more than half of the payment activity is in the Bangkok metropolitan area, where most check clearing takes place, and the clearing cycle usually takes two days.

The telecommunication system in Thailand consists of analog telephone lines, both public and leased lines, and four digital systems, including a satellite communication system. Improvements are continuously taking place.

Institutional and Organizational Framework

The Main Organization

The BOT has been the leader in the reform of the payment system. Its work has largely been carried out by a Payment System Development Committee, established in February 1991, comprising mainly heads of BOT departments and chaired by a BOT Deputy Governor. In March 1991, the Payment System Development Advisory Board was established with the participation of commercial banks’ senior executives and also chaired by the Deputy Governor. The Advisory Board coordinates any new measures with the private sector. In August 1993, the Payment System Development Office was established within the BOT to plan and coordinate new payment system initiatives (for details, see “Role of the Central Bank,” below). The Payment System Development Office was upgraded to the departmental level in February 1996.

Legal Framework

The BOT Act allows the BOT to operate a clearing system with settlement capabilities. For BAHTNET services, the BOT has issued the Bank of Thailand Regulation on BAHTNET, which sets the rules for service users. The rules identify service users’ rights and obligations in utilizing the system.

With respect to check clearing, rules for automated check clearing have been developed and attached to the original check clearing rules. However, for ECS and MEDIACLEAR, particular rules for each system, which are in the process of drafting, will be applicable.

Regarding the evidence law issue, some provisions of the Civil Procedure Code relating to the admissibility of evidence were proposed for an amendment to include electronic data. It is now under consideration by parliament.

Payment Instruments

According to the BOT Act, the BOT has the sole right to issue bank notes in Thailand. It is estimated that currency is used for about 70 percent of all payment transactions. Notes are printed in denominations of B 10, 20, 50, 100, 500, and 1,000 and account for almost 96 percent of the currency in circulation.

ATMs are operated by the banks. The administration and clearing of the ATMs are done privately. The ATMs use on-line electronic transfers and can be open 24 hours. Foreign (Visa, MasterCard, and American Express) and domestic card companies also operate in Thailand.

In 1991, checks accounted for 63 percent of the volume of noncash payments; automated credit transfers, 18 percent; credit cards, 13 percent; and direct debits, 6 percent. However, checks accounted for 98 percent of the value. The total value of checks cleared increased from 274 percent of GDP in 1980 to 1,259 percent of GDP in 1994.

Clearing and Settlement Systems

Retail Payment Systems


The BOT owns, operates, and administers a clearinghouse for checks that is used by 32 domestic commercial banks, foreign-owned banks, and special finance institutions in the Bangkok metropolitan area. An advisory committee with a maximum of seven members, appointed by the BOT, has been established to provide advice and make recommendations to improve efficiency. Members must comply with certain access criteria and be approved by the BOT. Members share clearinghouse expenses.

There are two clearing sessions for checks. Checks are collected by the banks and cleared at either the morning or the noon clearing, while unpaid return items are cleared the next morning. The morning clearing accounts for approximately 23 percent of the checks and 5 percent of the value.

Participants can deposit unsorted checks before 10:00 a.m. at the clearing center for the morning clearing. The noon clearing may include checks that have been deposited during 8:30 to 11:00 a.m. on the same day. Both clearings include large-value checks. Preliminary information on the settlement of both clearings is available to the banks about 3:30 p.m., or later on peak days.

Net debtors must have funds on their BOT account by the end of the day to settle the check clearing. The money market closes at 4:30 p.m. Net receivers of funds may use provisional funds for reserve maintenance purposes, but they may not withdraw them until after the return (unpaid) items have been processed. Returned items from both clearing sessions are cleared the next day by 9:00 a.m., with final net settlement figures communicated around 10:30 a.m. At this time, the provisional settlement of the previous day becomes final.


On July 6, 1996, the physical clearing of checks was replaced by an ECS. With ECS, banks will present magnetic ink character recognition (MICR) check data in standard format through a communication connection linking their computer systems with the clearing center of the BOT (on-line), although off-line facilities will still be available. For on-line members once the data have been captured electronically and transmitted to the ECS host computer, the BOT will sort them by paying bank and present a preliminary settlement balance to each bank by 4:00 p.m., which will include a list of large-value checks drawn on the paying bank. The paying banks have until 4:30 p.m. to agree to the settlement figures and to determine whether they will pay for the large-value items. Banks will be notified by 4:45 p.m. of the final settlement amount, net of large-value items to be returned unpaid.

Electronic data for all items will be available to the paying banks by 5:30 p.m. The physical checks must also be delivered by depositing banks to the clearing center during 5:00 to 7:00 p.m. The fine-sorted items together with the cross-check report will be available for pickup at the clearing center by 4:00 a.m. the next morning.

Operating rules have been developed and added to the clearing agreement. Detailed acceptance and running tests will be conducted before members are allowed to participate in the ECS.


The system will allow banks to send unsorted small-value bulk interbank transfers via magnetic media through a clearing center. All major domestic commercial banks have agreed to participate in the project, while participation of foreign-owned banks will be more limited.81 The government is also considering using MEDIACLEAR. The system will handle electronic debit and credit transfers and is designed to handle up to 1.2 million transactions a day.

The current plan is for participants to deposit items between two and seven days in advance of the settlement date. The BOT will store all the items sorted by receiving bank and present the items to the banks by the end of business one day before settlement. That evening, the receiving bank will post the payment to the retail customer’s account so that the funds will be available for withdrawal the next morning. Unacceptable data will be returned to the sending bank by 9:00 a.m. on the settlement day. Thus, for items received from the BOT on day 1, returns are envisaged on day 2 when settlement is final. The BOT has also taken measures to contain its risks in all areas, and rules and regulations have been drafted.

Large-Value Transfer System

Large-value transfers have mainly been conducted by check, including BOT checks with same-day settlement (see also the Thailand table in Appendix). However, a real-time gross settlement system, BAHTNET, which began operations in May 1995, is expected to replace most large-value checks and to some extent cashier checks.

The BOT administrates, operates, and owns BAHTNET. The number of BAHTNET service users increased from 32 at the beginning to 62 (as of July 1996) and is expected to reach 87 by the end of 1996. BAHTNET service users, which originally included all Thai and foreign commercial banks and a few specialized institutions, will encompass many finance companies, finance and securities companies, BOT’s in-house users, and a few other institutions. Since October 31, 1995, third parties have been allowed to use the system via participating financial institutions. The amount of third-party funds transfers accounts for 10 percent of total transfers through BAHTNET.

During its first 12 months of operation, BAHTNET generally handled an average of 131 transactions a day, with a total value ranging from B 8 billion to B 14 billion ($320 million to $560 million), equivalent to 16-30 percent of turnover in the money market. There were also about 90 current account enquiries a day. However, the commercial banks seldom used the bilateral communication option. The BOT now charges B 10 for interbank transfers and B 12 for third-party transfers.82

A paying bank may request the BOT to make a transaction at any time during BAHTNET’s operating hours, which are 9:30 a.m. to 5:30 p.m. The BOT notifies both the receiving and sending bank that the transaction is final and irrevocable immediately after the transaction takes place.

To control operational risks, sending banks have a designated terminal with internal security procedures to prepare and verify transaction messages. Participants are now also developing procedures to link BAHTNET to their own back-office computers for third-party funds transfer service. The BOT checks all messages for access right, format, and authenticity before accepting them. A contingency planning team has also been established to work on backup, continuation, and notification plans, including those for the host backup site and its network system.

The BOT manages its credit risk on an Intraday Liquidity Facility (ILF) by imposing fees and by requiring that such credit be fully collateralized. Thai government securities and BOT bonds can be used as collateral for the ILF, which began its operation in February 1996 (see the next section).

Role of the Central Bank

Organization of Payment Activity at the Central Bank

Payment system issues are handled by an internal committee with 12 representatives. The committee, which meets regularly, is chaired by the Deputy Governor and includes three Assistant Governors and eight department directors.

The Payment System Development Office was organized by the BOT to coordinate payment projects and to work closely with the senior management committee to ensure that all elements of each project have been studied before implementation. The Office, which was upgraded to a departmental level in 1996, also develops position papers and spearheads the implementation of new initiatives. The BOT’s Information Planning and Operations Department works on hardware and software.

There are many supporting committees working on the evolution of the payment system at the BOT. They have frequent contact with the banking community, at both the executive and operational levels. The Deputy Governor represents the BOT in the Thai Bankers’ Association, which also is involved in payment issues.

The Banking Supervision Department works closely with the Payment System Development Office in setting guidelines for electronic payment and auditing procedures. The Audit Department has been involved with reviewing internal controls and security systems since the inception of the design of the payment system reforms. Internal audit procedures are concurrently adjusted to the reforms of the payment system.

Monetary and Credit Policies

There is no explicit operating target for monetary policy, but the BOT pursues price stability and a virtually fixed exchange rate policy. The repurchase market is the main vehicle of the BOT’s liquidity management and is fully operated by the BOT. In 1995, the BOT began to issue BOT bonds of several maturities so as to strengthen the conduct of monetary policy and to give birth to benchmark interest rates. Settlement takes place same-day on the participants’ accounts at the BOT. Each bank has a single consolidated current account at the BOT in Bangkok.

Since 1979, a uniform liquidity requirement of 7 percent has been levied on the deposit liabilities of commercial banks and on the total borrowing from the public of finance companies; of this 7 percent, at least 2 percent must be held in a current balance at the BOT, no more than 2.5 percent as cash in hand, and the rest in eligible securities. In the case of finance companies, 0.5 percent of deposit liabilities must be deposited at the BOT. Averaging is allowed over the two-week reserve maintenance period; the required reserves are calculated based on the previous two-week period. All balances in a bank’s current account at the BOT—both required and excess reserves—can be used to settle payments.

Commercial banks and finance companies can borrow from the BOT under repurchase agreement against eligible papers, from overnight to seven days, at the so-called “bank rate,” which is used as an instrument for signaling and sometimes is below the market rate. However, the BOT questions banks using the loan window facility, to prevent frequent use. The window closes at 4:00 p.m. (half an hour after the close of the repurchase market).

The ILF, which began in February 1996, allows fully collateralized intraday overdrafts of up to 30 percent of the loan window access. An interest rate was set at 1.5 percentage points over the average repo rates of the morning and afternoon sessions.

Major Ongoing and Planned Payment System Projects

A number of additional reforms are being planned. These include developing a real-time electronic DVP system for settlement of government securities (1995–97); extending the service of BAHTNET to cover nonbank financial institutions and the BOT’s own regional branches and offices; developing MEDIACLEAR to accommodate on-line data presentation; clarifying and amending legislation, notably for electronic funds transfers; and developing procedures to improve check clearing and settlement outside Bangkok.

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