Prepared by Vikram Haksar.
Further details of developments during the crisis and the ensuing reforms can be found in, Financial Sector Restructuring, Chapter III of the Selected Issues paper for the 1999 Article IV Consultation discussion (SM/99/304).
Under BOT regulations, banks are required to write-off from their balance sheets the provisioned portion of NPLs that have been classified as loss for 12 months. The write-off represents the very low likelihood that the bank will recover the loan, and is thus a fuller recognition of the loss that had been provisioned. The bank continues to maintain its full legal claim on the debtor, and will continue to calculate accrued interest and other penalties that may be included as part of any ultimate debt restructuring deal.
The monthly flows might appear small, and there should in any event be some entry and exit of NPLs in the financial system under a normal steady state situation. However, monthly new and reversion NPLs combined have been averaging about 0.8 percent of loans outstanding in recent months. This would imply that over the course of one year, NPLs could rise by a sizeable 10 percent of loans, all else being equal.
October 1999 is chosen as the base period as data giving a break-down of debt restructuring by private and state banks is available only from then onwards.
See Financial Sector Restructuring, Chapter III, SM/99/304 for a discussion of hybrid capital instruments as well as a description of the Tier-1 capital support scheme.
The pre-crisis asset bubble was particularly severe in the real estate sector with a substantial increase in construction activity reflecting rapid credit growth to the construction and property sectors, particularly from the finance companies. While overall asset prices have fallen substantially since the crisis, real estate valuations remain difficult to ascertain given the extremely low level of actual transactions currently taking place.
This issue is discussed further in Developing the Valuation Profession in Thailand (1999), a White Paper commissioned by the Securities Exchange Commission of Thailand and undertaken by the Royal Institution of Chartered Surveyors Thailand Group.
Chapter III provides a detailed description and assessment of the structure of the TAMC, including details on the impact of the TAMC on private banks.
Net interest income (and implied yields/spreads) in the base case is derived from financial statements as of 2000Q4. Net operating non-interest income in the base case is assumed to be the average in 2000. In Scenario (i) the spread on performing assets (excluding restructured loans which are assumed to yield 3 percent across the board) is lowered by 100 basis points. In Scenario (ii) 1/3 of restructured NPLs are assumed to revert in a 12-month period through end-2001. These NPLs are assumed to have 50 percent collateral cover, and to require 50 percent provisions net of collateral. Accordingly, provisioning charges arise. Scenario (iii) combines scenarios (i) and (ii). In all scenarios, baht figures for quarterly net interest income and net profit are provided. These baht figures are also scaled by the appropriate lending/asset measure to provide ratios in all cases. Finally, the implications of these scenarios for the Tier-1 capital ratio are derived for a 12-month period. The analysis here takes into account the TAMC’s impact on the banks.
For example, at an assumed loss rate of 60 percent, private bank unassisted capital need would amount to baht 240 billion, while the gain-loss sharing with TAMC would reduce this only by about baht 37 billion. Further details are presented in Chapter III.
The total capital raised by private banks since the crisis amounts to about 16 percent of their average risk weighted assets.