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.