Abstract
This Selected Issues paper on Thailand reviews public investment and investment recovery from financial crises. Thailand is a country with a moderate tax effort, which indicates that increases in public saving should be achieved through a mixture of tax and expenditure measures. Future budgets should accommodate the megaprojects without putting excessive pressures on public finances, inflation, and the external balance. Least present value of revenue (LPVR) auctions alleviate the demand risk inherent in the fixed-term contracts and thus eliminate a key driver for renegotiations and the provision of minimum income guarantees.
IV. Financial Sector Developments and Issues28
A. Introduction
75. A decade after the financial crisis, Thailand’s financial sector has seen steady improvement in resilience, efficiency, breadth, and depth. The banking sector has benefited from strong economic growth, consolidation and recapitalization efforts, improved risk management, and operational restructuring. In addition, banking regulations and oversight have been strengthened. Initiatives have been introduced to deepen and broaden domestic capital markets.
76. The core challenges going forward are to consolidate these achievements while pushing on with reforms aimed at further strengthening the role of markets. This would involve deeper institutional reforms and liberalization measures. It would also include strengthening regulatory oversight to international best practice standards, and forcefully resolving the legacy problems that are still hampering banking soundness. The next section reviews recent developments in Thailand’s financial sector before discussing the main long-term challenges facing the sector.
B. Developments—Structure, Resilience, Breadth, and Depth
Banking sector
Structure
77. The structure of the banking sector has changed markedly since the 1997 financial crisis (Figures 1 and 2). This reflects a host of factors, including (i) large scale government intervention to restore stability through bank recapitalization, closure, and mergers; (ii) private bank recapitalization, resulting in ownership dilution; (iii) market opening measures to allow for more foreign competition; and (iv) more recently, the consolidation achieved through the implementation of the Financial Sector Master Plan (FSMP) in 2005.29
78. As such, the number of financial institutions has declined sharply from 135 at end–1996 to 43 at end–September 2006. However, most of the consolidation was among finance companies, with over 50 finance companies closed during the1997 financial crisis, and with very little among banks. Despite the relative large number of commercial banks, the sector is concentrated, with the top five accounting for just over half of banking assets at end–2005. While foreign banks are playing a more important role, they continue to face limits on the number of branches and on ownership.30
79. The government’s role in financial intermediation increased sharply over the past decade, largely because of intervention during the financial crisis. In recent years, its participation has declined through sales of intervened banks to the private sector, including foreign investors, as well as share dilution as a result of bank’s recapitalization efforts. As a result, banks with significant government ownership accounted for over one–fifth of total banking assets at end–2005.31 If deposit–taking special financial institutions (SFIs) are included, the government’s share would rise over 40 percent.32
Profitability
80. Banking profitability strengthened in 2005 and through 2006 despite a more challenging operating environment (Figure 3). While loan growth slowed, profitability was helped by rising net interest rate margins and strong noninterest income. The latter has increased as result of banks’ ongoing efforts to diversify their revenue sources. Noninterest expenses have been kept in check, reflecting improved operational efficiencies from IT related investments and greater competition. However, large provisioning continues to act as drag on profitability. Although performance was strong across most banks, there are a few midsized banks reporting low profitability and capital.
Thailand: Financial Sector Compared with Other Selected Emerging Market Countries
Citation: IMF Staff Country Reports 2007, 231; 10.5089/9781451969368.002.A004
Source: World Bank.Thailand: Financial Sector Compared with Other Selected Emerging Market Countries
Citation: IMF Staff Country Reports 2007, 231; 10.5089/9781451969368.002.A004
Source: World Bank.Thailand: Financial Sector Compared with Other Selected Emerging Market Countries
Citation: IMF Staff Country Reports 2007, 231; 10.5089/9781451969368.002.A004
Source: World Bank.
Thailand: Financing in Selected Asian Countries
Citation: IMF Staff Country Reports 2007, 231; 10.5089/9781451969368.002.A004
Sources: World Bank; Asian Bondsonline—Asia Bond Indicators.Note: 2006 data indicates March 2006 data, otherwise indicated.Thailand: Financing in Selected Asian Countries
Citation: IMF Staff Country Reports 2007, 231; 10.5089/9781451969368.002.A004
Sources: World Bank; Asian Bondsonline—Asia Bond Indicators.Note: 2006 data indicates March 2006 data, otherwise indicated.Thailand: Financing in Selected Asian Countries
Citation: IMF Staff Country Reports 2007, 231; 10.5089/9781451969368.002.A004
Sources: World Bank; Asian Bondsonline—Asia Bond Indicators.Note: 2006 data indicates March 2006 data, otherwise indicated.
Thailand: Development in Banking Indicators
Citation: IMF Staff Country Reports 2007, 231; 10.5089/9781451969368.002.A004
Source: Bloomberg.Thailand: Development in Banking Indicators
Citation: IMF Staff Country Reports 2007, 231; 10.5089/9781451969368.002.A004
Source: Bloomberg.Thailand: Development in Banking Indicators
Citation: IMF Staff Country Reports 2007, 231; 10.5089/9781451969368.002.A004
Source: Bloomberg.Developments in bank lending
81. Lending growth has moderated as borrowers became more sensitive to higher interest rates, weaker domestic demand, and general uncertainty. Consumer lending also slowed as tighter prudential regulations took effect.33 Consumer bank loans now account for 20 percent of total loans, up from 10 percent a decade ago, with collateralized housing loans accounting for two–thirds of the total. While the rise in consumer lending has led to higher household debt, it is still low (about 26 percent of GDP, with debt service amounting to about 2–3 percent of income). Still, some lower income households are more highly leveraged and would be sensitive to any downturn.
82. Despite the steady growth in bank lending since 2001, the share of bank credit in the economy remains below crisis levels. Bank credit has declined to 80 percent of GDP at end–2005 from 128 percent at end–1997. Most of this can be accounted for by sharply lower nonfinancial corporate borrowing and technical factors such as nonperforming loan (NPL) sales to asset management companies (AMCs) and write–offs. Corporate disintermediation has been partially offset by borrowing through capital markets. In 2005, Thai companies raised a total 25 percent of GDP on the local capital markets. Companies are also relying on strong internal earnings to fund themselves.
Asset quality and capital adequacy
83. While the quality of bank assets has improved, the level of distressed assets (NPLs and foreclosed assets) in the banking system remains still high and continues to pose a risk to banks. Sounder corporate finances, a more balanced asset structure, and improved risk management have enhanced asset quality. This has led to a decline in NPLs, which have fallen to 7.5 percent at end–2006. Nevertheless, NPLs remain high—among the highest in the region—with the bulk of the NPLs concentrated in the manufacturing sector. Total distressed assets in the banking system account for about 17.5 percent of bank’s total loans, if restructured loans were included. Most banks, however, maintain high loan loss reserves and also are sufficiently capitalized, with the averaged capital adequacy ratio for the banking system––at 14 percent––above the regulatory minimum.
84. Several factors account for the slow progress in dealing with NPLs. This includes: (i) reclassification of restructured loans to NPLs; (ii) legacy issues, with about 40 percent of NPLs related to protracted court cases; and (iii) new NPLs, although modest in increase.
85. In mid–2006, the BOT announced a number of steps to accelerate the resolution of distressed assets in the banking system and to improve loan classification and provisioning practices. The state–owned Bangkok Commercial Asset Management (BAM) is expected to buy NPLs and NPAs from all banks. More importantly, the BOT will introduce IAS 39, applying discounted cash flow and fair market valuation to loans.34 This change should create incentives for bank to reduce their distressed assets. The BOT’s aim is to lower system–wide NPLs net of provisioning to 2 percent by end–2007.
Liquidity and market risks
86. Banks continue to be highly liquid with the loan–deposit ratio at only 86½ percent. They also continue to hold significant excess reserves. Deposits have risen in response to higher rates while loan growth has stagnated. The blanket government deposit guarantee along with improved banking soundness has helped underpin confidence in the banking system.
87. Market risks also do not appear to pose a significant risk to Thai banks. Banks, for instance, have not been much affected by market volatility in 2006.35 Most of banks’ holdings of securities are in government securities, and are hedged through interest rate swaps or otherwise held to maturity. In addition, prudential regulations limit banks’ securities holdings and banks are also required, as of end–June 2005, to hold capital against market risk.
Regional comparison
88. Developments in Thai financial soundness indicators are comparable to other regional banks. 36 Nevertheless, when comparing individual performance among the largest banks in the region, the large top–tier listed Thai banks lag somewhat in financial performance. (Figure 4).
Thailand’s Banking Sector vs. Other ASEAN Countries
Citation: IMF Staff Country Reports 2007, 231; 10.5089/9781451969368.002.A004
Source: Global Financial Stability Report.Thailand’s Banking Sector vs. Other ASEAN Countries
Citation: IMF Staff Country Reports 2007, 231; 10.5089/9781451969368.002.A004
Source: Global Financial Stability Report.Thailand’s Banking Sector vs. Other ASEAN Countries
Citation: IMF Staff Country Reports 2007, 231; 10.5089/9781451969368.002.A004
Source: Global Financial Stability Report.Market indicators
89. Market indicators support the relatively benign view of prospects for the banking system, although ratings suggest continued fragilities.
Share prices for listed banks have outperformed the overall index since the beginning of 2006. The relative good performance despite a challenging environment likely reflects improvements in banking fundamentals, sufficient liquidity, and overall positive prospects going forward. Bank valuations are higher than that of the overall market.
Overall, Thai banks’ credit ratings remain low. This is visible in the D rating in Fitch’s Banking System Index or high industry risk rating in Standard and Poor’s (S&P) Asia Pacific Banking outlook.37 Rating agencies cited a number of factors holding back ratings, including high NPLs and restructured loans and an unfinished legal and regulatory reform agenda.
Fitch: Banking System Risk Matrix
Bank scale rating A–E, with A highest score.
Rating of macroeconomic environment, with 1 highest rating of scale 1–3.
Distance to default indicators (DDs)38 shows that the risk profile for local banks listed on the SET has not deteriorated compared to 2005 (Figure 5). There was some temporary downward trend in first quarter of 2006, but the DDs of all listed banks increased in the second half of 2006. The system on the whole is stable with banks showing a trend improvement in DDs over recent years.
Thailand: Distance to Default in Thailand’s Banks
Citation: IMF Staff Country Reports 2007, 231; 10.5089/9781451969368.002.A004
Source: Bloomberg.Thailand: Distance to Default in Thailand’s Banks
Citation: IMF Staff Country Reports 2007, 231; 10.5089/9781451969368.002.A004
Source: Bloomberg.Thailand: Distance to Default in Thailand’s Banks
Citation: IMF Staff Country Reports 2007, 231; 10.5089/9781451969368.002.A004
Source: Bloomberg.Near term outlook and risks
90. Given the positive economic outlook, sufficient liquidity and improved earnings capacity, the outlook for the banking sector is generally positive. However, weaker growth and investment could increase credit risks and dampen loan demand. Near–term pressures are also increasing as a result of greater competition and regulatory changes (e.g., the movement to IAS 39 and preparation for Basel II). The adoption of IAS 39 is expected to curb profits as banks will need to set aside higher provisions. The introduction of the capital controls in December 2006, if not temporary, could also impact the funding costs of smaller banks and foreign branches as these rely more on markets for funding. Overall, however, the banking system is more resilient and better positioned to weather shocks than a decade ago.
Financial markets
Structure
91. Local capital markets are playing a greater role in mobilizing and channeling savings, developing risk instruments, and in providing competition to the banking sector (Figure 6).
The Thai bond market is now the fourth largest in Asia (outside Japan). It is dominated by government paper: while central government issuance of longer–term debt has declined due to the budget surplus, this has been offset through issuance by the BOT, which accounted for half of public debt issuance in 2005. Public sector debt is largely held by local institutional investors, while commercial banks’ share has declined and foreign holdings are small (less than 4 percent). Government savings bonds accounted for most of the issuance in the first half of 2006.
While much of the corporate bond issuance in the immediate post–crisis period was dominated by banks, energy, transportation and property development companies are now accounting for greater share of issuance. Most of the issuance is dominated by high–quality/rated borrowers, and is either unsecured long–term paper or short–term commercial paper. The latter helps nonlisted companies tap the market.
Similar to debt market trends, the equity market has increased fivefold since the financial crisis. The market valuation of the Stock Exchange of Thailand (SET) exceeds US$100 billion, and is the fourth largest stock exchange in Asia (excluding Japan). Encouraged by tax concessions in 2003, almost 100 companies have since listed on the SET. The top 10 listed companies account for more than half of total market capitalization and trading, with foreign investors being large holders of their shares. Turnover ratio is high compared to other exchanges in the region (second to Korea), reflecting also relatively low transactions costs and no capital gains tax on equities. On the other hand, the free float at 46 percent is relatively low, reflecting the government’s high holdings of privatized companies and Thai companies’ reluctance to further dilute ownership and control.
The development of the capital markets has resulted in higher derivative transactions. Interest rate swaps outstanding have tripled in size in the past three years as market participants have been hedging in response to interest rate movements.
Securitization is also picking up, primarily through the government, which issued its first asset backed security (ABS) in 2005 backed by lease income from a new government office project. Corporations have made very little use of ABSs or other structured products.
Thailand: Financial Market Indicators
Citation: IMF Staff Country Reports 2007, 231; 10.5089/9781451969368.002.A004
Sources: Bank of Thailand and Bloomberg.Thailand: Financial Market Indicators
Citation: IMF Staff Country Reports 2007, 231; 10.5089/9781451969368.002.A004
Sources: Bank of Thailand and Bloomberg.Thailand: Financial Market Indicators
Citation: IMF Staff Country Reports 2007, 231; 10.5089/9781451969368.002.A004
Sources: Bank of Thailand and Bloomberg.92. A range of measures were introduced in 2006 to enhance market infrastructure and efficiency. This includes: (i) an over–the–counter electronic real–trading platform for fixed income and related securities; (ii) a central securities depository for government securities by Thailand Securities Depository (TSD); (iii) securities lending and short sales; (iv) a requirement for bond dealers to report all trading transactions to the Thai Bond Market Association; (v) the ABF Thailand Bond index, making it the first exchange trade fund; and (vi) the Thailand Futures Exchange, with its first traded product––the SET 50 Index Futures.
93. Both supply and demand factors have supported market development. This includes (i) progressive deregulation of the securities industry to increase competition and diversify the system; (ii) banks and the government need to raise capital in the post–crisis period; (iii) improvements in corporate governance practices; (iv) tax incentives to spur demand for capital market products and asset management services and for corporations to tap the financial markets; (v) privatization of some profitable SOEs; (vi) the development of a yield curve in government debt securities; and (vii) improvements in the market infrastructure, including payment systems.
Performance
94. Financial markets have been more volatile, reflecting broader political and global developments. This included, in 2006, the political turmoil beginning in April, the EM correction of May–June, and the military coup in September. More recently, wide–ranging capital controls, the New Year’s Eve bombings in Bangkok, and prospective changes to the foreign investment framework have weighed negatively on markets.
Volatility in equity markets, interest rates, and the exchange rate was higher in 2006 compared to previous years.
Sovereign risk indicators such as sovereign spreads and the five–year sovereign credit default spread edged up compared to 2005. Nevertheless, spreads and yields are near historic lows, reflecting Thailand’s solid fundamentals and high global liquidity.
95. The ease with which the financial sector has managed the recent shocks reflects strides made in strengthening economic management and financial sector resilience. These include: a strong external position, high international reserves, low external debt burden, enhanced financial transparency, a flexible exchange rate regime, enhanced monetary credibility, improved risk management among financial institutions, and a more diversified and broader financial market. As such, Thailand’s financial system is better positioned to insulate itself against a sudden sharp withdrawal of external capital.
C. Challenges—Building a Framework Supportive of a More Efficient and Diverse Financial System
96. The core issues and challenges facing policymakers are to consolidate the significant achievements made to date, while pushing for reforms that will help achieve a more efficient and diverse financial system. A well–functioning financial sector is characterized by resilience and depth, and underpinned by competition, sound risk management, strong corporate governance, a broad range of products and services, and innovation.
97. What will be needed to foster greater efficiency and diversity gains in Thailand’s financial system? Given the importance of banks to the financial system, a key challenge is to ensure that banks are strengthening their risk management practices. To this end, supervisory oversight and prudential regulations will also need to be brought in line with international best practices. Regulation and supervision of nonbank financial institutions and capital markets also deserve special emphasis, given their growing importance. Furthermore, corporate governance practices, the quality of reporting, and the market infrastructure can be further strengthened. Consideration could be given to deregulating certain areas of financial services to encourage competition and market development. The government may also want to consider divesting its significant stake in the banking industry and expediting the sales of its holdings of nonperforming assets and restructured loans to the market. In addition, the role of SFIs should be examined to assure that it is consistent with market development and with SFIs’ mandate. Of course, policymakers will need to be mindful of balancing the need for market development against that of ensuring financial stability.
Strengthening banks
Improving risk management
98. A host of reforms are underway or in the pipeline to upgrade regulatory oversight, including through legislative reforms and the adoption of risk–based supervision. The BOT and the SEC are encouraging local banks to further upgrade their risk management and governance practices. Recognizing the critical oversight role played by banks’ Board of Directors and senior management in the risk management process, a Director’s Certification Program was established in 1999 to provide directors with a better appreciation of their fiduciary responsibilities. A Director’s Handbook was also published to guide directors of financial institutions on corporate governance matters. Furthermore, the BOT established corporate governance guidelines for banks, including fit and proper tests for directors and executives, and requiring the establishment of risk management, audit, credit risk, and asset–liability committees. Additionally, compensation and remuneration committees are also recommended. In parallel, the SEC introduced governance standards for company directors and executives. These in turn have to register with the SEC’s Directors and Executive Registration Database.
99. Banks have also begun implementing more modern risk management techniques. This includes introducing internal rating systems, credit scoring models, and collecting debt and payment records from the national database of the Credit Bureau for credit default analysis.39 Under the guidance of the BOT, local banks have separated marketing and sales departments from credit analysis departments. The larger banks are beginning to use internal credit ratings and loan pricing methods to assess their corporate lending. Banks are also upgrading their IT systems and risk management framework in anticipation of Basel II. All these measures, along with frequent application of stress testing should—if effectively implemented—help strengthen the resilience and efficiency of the banking system.
Reforming the regulatory framework
100. Passage and implementation of a number of proposed legislative reforms would help improve regulatory oversight and enhance market discipline:
Amendments to the BOT Act are expected to strengthen the BOT’s operational independence.
The Financial Institutions Business Act (FIBA) is expected to strengthen the BOT’s supervisory powers, including instruments available to address weaknesses in banks and coverage of institutions. Work is already ongoing to strengthen supervision on a consolidated basis.
The new Deposit Insurance Agency Act (DIA) should help re–introduce more market discipline to the banking sector in the long run and put pressure on banks to improve their financial strength. The DIA Act would replace the current blanket deposit guarantee. The DIA will be phased in over four years to allow financial institutions and depositors to adjust to the new framework. A key issue will be to develop an effective communication strategy to build understanding among depositors.
101. Adoption of Basel II is envisioned for end–2008. The BOT has issued a series of consultative papers in 2005 on specific policies and guidelines relating to Basel II implementation.
Moving towards risk–based supervision
102. The BOT is upgrading its risk–supervisory and monitoring practices. In preparing for Basel II, the BOT has developed a range of database and risk–management systems and a framework for cross–border supervision and training programs for supervisors. This includes the use of scenario analysis, the development of an early warning system on a bank–by–bank basis, and the publication of quarterly macro prudential indicators. The BOT has also issued five prudential guidelines to enhance banks’ risk management practices: internal rating systems, credit risk management of loan portfolios, credit scoring, risk model validation, and credit and market risk stress testing.
Regulating SFIs
103. Plans have been announced to strengthen prudential regulations governing SFIs. The intent is to give the BOT the mandate to supervise these institutions and subject them to commercial banking prudential standards. There has been some concern that their regulatory advantages may have resulted in unintended distortions in the market.
Strengthening Financial Markets40
104. While Thailand’s financial markets are deeper and more developed when compared to countries with similar per capita income, bank financing is still the most important source of external financing. The pool of capital market products continues to be limited while the secondary market for fixed income securities and equities remains shallow. Market activity is primarily retail driven, while institutional investors play a minor role.41 Weaknesses in corporate governance practices still undermine market development.
Enhancing market infrastructure
105. A well–functioning government securities market is critical to promoting capital market development and to lowering the government’s borrowing costs. A core challenge is to find ways to increase the volume of government debt on issue, including through consolidating outstanding issues to “on the run” issues coupled with exchanges or redemptions of existing small and irregular issues. Consolidating the various sovereign–related issuance activities (SOE guaranteed and central government) in a single government–borrowing program would help increase the volume of government debt and improve market liquidity. Relaxing the complex and relatively stringent rules governing public debt management would also allow for more flexibility in debt and risk management, including in the context of budget surpluses, pre–financing, reopening, and tap issues. The role of primary dealers in making markets should be brought in line with best practice standards, including reviewing the possibility of giving them exclusive rights in the primary auctions and some liquidity support facility in return for being obligated to make markets. Finally, the government’s cash management framework could be strengthened, in particular with regard to forecasting cash flows and financing requirements. Among others, this would help improve the credibility of the government’s issuance plans, but also yield other benefits such as enhancing BOT’s liquidity forecasting and management.
106. A number of other reforms would help improve secondary market liquidity in government securities. The BOT’s changes to its repo facility in 2007 should help spur the private repo market. This would allow market participants to better hedge their positions and manage liquidity efficiently. Tax neutrality issues between bonds and equities also needed to be examined, with the current system favoring equities over debt.42 Finally, consideration should be given to removing the special business tax entirely. Most countries have done away with this type of turnover tax as it tends to hinder secondary market trading.
107. The government is also planning to reform the stock broking industry. At present, the Thai stock broking industry is heavily regulated and protected. The commission rate is fixed at 0.25 percent, the number of brokers has been fixed for some time, and there are restrictions on the services and products it can provide. In general, the industry has done a poor job in contributing to capital market development. The reform plan is to gradually abolish the fixed commission rate, raise capital requirements, and liberalize the industry through free entry and greater competition.
Developing the investor and issuer base
108. A broad base of investors, with different risk preferences and time horizons, and professional risk management capacity, is key to market development. The government is reviewing a draft reform that proposes introducing a minimum social security system along with a mandatory provident fund system for all salaried employees of the private sector and those not covered by the Government Pension Fund. This would help broaden the coverage and make the system more affordable given demographic trends. If organized and managed in a decentralized fashion, similar to the one introduced in Hong Kong SAR, where individuals are allowed to choose from a selected list of private sector fund managers, a mandatory pension system could provide much needed impetus to demand and market development.
109. Market demand could be further stimulated by examining the current prudential regulations governing asset allocation for insurance and pension funds. Insurance and pensions are subject to quantitative limits on their holdings of corporate bonds (by rating and sector), equities, and foreign assets. Because of a narrow domestic supply base and limited acceptable asset classes, funds are invested domestically and predominantly in government bonds, deposits, and cash, yielding a low return. As assets increase over time as a result of pension reforms and demographic reasons, these limits may be difficult to maintain and not necessarily prudent. Moving toward a risk–based regulatory framework for insurance or prudent man rules for pensions would help move away from a less prescriptive investment allocation regime. Of course, while liberalizing these regulations, caution would needed to ensure robust risk management and governance practices within the insurance and pension industries and an appropriate regulatory and supervisory framework.
110. The government is also considering ways to attract a larger pool of issuers to the SET and to improve the float. This is a difficult task as most companies in Thailand are family–owned and controlled, and prefer to use the bank or money market for financing. Or if listed, they maintain tight control through direct appointments of board members and distribution of shares among management and board members. Improving the protection of minority shareholder rights, including through strengthening the oversight role of the board and the independence of board directors may also help alleviate this problem.43 Tax incentives could help attract companies to the SET. Indeed the SET has successfully used tax incentives over the past three years to this end. Privatization of profitable SOEs could also help expand the issuer base while divestiture of the government’s outstanding shares of listed companies could also help improve the float in these companies. Finally, the SEC is also looking at reducing listing costs, which were identified as being higher than in other exchanges for the region.
111. Securitization could help expand the supply of credit instruments and enhance risk management. Although their high liquidity tends to dampen the need for securitizing loans, banks may find securitization useful to manage balance sheet risks in preparation for Basel II. Moving to IAS 39 may also help spur this. Securitization could also be used by the government as vehicle for selling the large stock of foreclosed assets and restructured loans held by state AMCs to the market. In many countries, securitization (e.g., receivables) has also been helpful in opening doors for SMEs to market–based financing.
D. Summary
112. Significant progress has been made in strengthening the financial system since the 1997 financial crisis. Its resilience to domestic and external shocks has improved. Capital markets are also playing a more important role in the financial system. The authorities in Thailand are in the process of implementing a host of “second–generation” reform initiatives, including identifying gaps with global standards and designing a reform plan for both the banking sector and capital markets (i.e., the 2nd FSMP and the Capital Market Master Plan II). The forthcoming FSAP will also help identify existing gaps in the regulatory and supervisory framework and will help provide a roadmap for future reform.
Prepared by Jeanne Gobat.
The financial sector master plan (FSMP) allows for two types of banks—commercial and retail banks. Finance companies and credit fonciers can merge and convert to banks or alternatively become nonbanks.
The Banking Act was amended in 1997 to allow foreign entities to hold shares in Thai financial institutions in excess of 49 percent for ten years. After 2007, additional shares purchased must amount to less than 49 percent. Invested amounts during 1997–2007 are grandfathered.
By end–1999, the government sold three out of the six banks taken over by the Financial Institutions Development Fund (FIDF) during the crisis to foreign investors.
The four deposit taking SFIs include Government Housing Bank (GHB), Government Savings Bank (GSB), Bank of Agriculture and Agricultural Cooperatives (BAAC), and Islamic Bank of Thailand. The main depositors are the government, state–owned enterprises (SOE), civil servants and also small savers. The GHB and GSB are the sixth and eight largest banks respectively in terms of assets and deposits. These SFIs were set up to carry out the government’s social and economic development policies, in particular with regard to credit extension to small– and medium–sized enterprises, households, local governments, and rural areas. Deposit–taking SFIs are regulated by the Ministry of Finance (MOF) and their respective ministries, although the Bank of Thailand (BOT) conducts annual on–site examination. They benefit from both regulatory and tax advantages.
Between 2002 and 2005, the BOT introduced (i) regulations on minimum monthly income and debt repayments; (ii) limits on interest rate charges on credit card for both banks and nonbanks; (iii) stricter debt repayment and credit line rules for consumer loans; (iv) maximum loan–to–value ratios for mortgage loans; and (v) regulations on unsecured personal loans for both banks and nonbank financial institutions, with credit limits set as a percentage of monthly income.
Under the new standard, which will be gradually applied at end–2006 and over 2007, loan–loss provisions will be made by comparing the carrying amount of a loan with the net present value of the estimated discounted cash flows of the loan.
A more detailed assessment of banks’ vulnerabilities to market risks and contagion is being done in the context of the FSAP.
Generally, however, cross–country comparisons are difficult because the application of different accounting, prudential, and enforcement standards.
The Fitch rating measures the strength of the banking system, based on individual ratings of the core banks in the system (asset–weighted average). It abstracts from potential government or private support.
DDs combine data on the market value of assets, its mean, and its volatility into a composite measure that indicates risk of defaulting for a bank. For each bank, the DDs are constructed using daily 2005 data for market value of equity and the end–2005 book value of liabilities. The market value of equity is viewed as the call option on banks’ assets, with a strike price equal to the current book value of liabilities. The DDs figure shows the number of standard deviations the market value of assets has to deviate from the mean in order for default to occur. An increase in DDs signifies lower risk. The DDs on individual banks are averaged to yield the system wide DDs for Thailand.
In 2005, the Credit Information Business Act was passed to strengthen the legal basis for creditors to share information. The act became effective in February 2006. In addition, the Thai Credit Bureau and the Central Credit Information Services were merged in 2005 to form the National Credit Bureau (NCB). NCB’s credit database has now grown to more than 20 million accounts, covering more than 10 million customers. NCB collects and warehouses debt and debt service records and also compiles a negative list.
The issues, priorities, and recommendations discussed in this section are drawn from the December 2005 IMF technical assistance mission on Capital Market Development and the January 2006 report by the Asian Development Bank—both of which reviewed and commented on the government’s Capital Market Master Plan II.
Retail investors account for about 25 percent of the SET’s market capitalization and for 60 percent of market turnover, significantly higher than any other exchange in the region.
Capital gains on bonds are taxed whilst equities are exempted. In addition, interest income is taxed at a higher rate than dividends.
In early 2004, Thailand participated in the Report on the Observance of Standards and Codes (ROSC) of its corporate governance standard. Among the ROSC’s main recommendations were (i) upgrade the legal and regulatory framework; (ii) improve enforcement of laws and regulations; (iii) make Thailand’s accounting standards fully consistent with International Accounting Standards (IAS); and (iv) strengthen minority shareholder’s rights. See the World Bank’s Corporate Governance Assessment for Thailand, June 2005.
