The Small and Medium Enterprise Development Bank of Thailand (SME Bank) has taken the unusual step of asking the Finance Ministry to compensate it for bad debts caused by the government's public service initiatives.
A vendor makes his way pastSMEBank headquarters on Phahon Yothin Road in Bangkok on Tuesday. In a shock move, the bank has asked the Finance Ministry to compensate it for NPLs stemming from lending under the government’s public service policies. THITI WANNAMONTHA
Executive chairman Pichai Chunhavachira said the move would immediately eliminate about 18% of its non-performing loans (NPLs).
That much of SME Bank's current NPLs are from money lent to debtors under the public service account (PSA) system, he said.
While banks normally report their NPLs to the Finance Ministry, they have never asked for compensation before.
"Since this lending was made to serve the government's public service policies, the Finance Ministry is obliged to set a budget to help banks cut their bad debts," said Mr Pichai, who is widely known as the mastermind behind the business rehabilitation of PTT and TMB Bank.
For example, these PSA loans were provided to flood-affected operators and victims of political strife, he said.
They were approved without proper screening due to the public service objectives, and this has resulted in a high default level.
The state-run SME Bank now has the largest level of NPLs in the banking industry.
Mr Pichai, who also chairs SME Bank's rehabilitation committee, updated the figures yesterday to show 40.2% NPLs or 39 billion baht of its total 97 billion in outstanding loans.
The PSA NPLs comprise 7 billion baht or almost 18% of total NPLs.
SME Bank wants to reduce its NPLs by 10 billion baht or 25.6% to 29 billion this year and 17 billion baht by 2015 while increasing outstanding loans to 150 billion baht by 2017.
Its BIS ratio is only 1%, far lower than the Bank of Thailand requirement of 8.5%, and Mr Pichai admitted it would be difficult to improve much on that.
However, a lower NPL level and higher net loan amounts will help to boost profits, which would in turn automatically improve the BIS ratio, he said.
Mr Pichai said general bad debts will need to be resolved on a case-by-case basis.
"For those borrowers who cannot restructure their debt, we need to ask them to sell their collateral to pay it off. Fortunately, property values are now rising, so we hope it won't be too hard for them to be clean of debt," Mr Pichai added.