April 1 marked the centennial of the Government Savings Bank (GSB). One hundred years ago, King Rama VI laid the foundation for an institution that would educate Thai people about banking services and promote savings habits among citizens.
Today, the GSB is among the strongest players in Thailand's deposit and borrowing market. Its market share of 14% is comparable to those of the largest commercial banks. As well, it has a few legal advantages over its private competitors.
As a specialised financial institution (SFI) supervised by the Finance Ministry, the GSB doesn't have to contribute to the Financial Institutions Development Fund (FIDF) or deposit insurance, so it has lower operating expenses, 0.47 satang for every baht of deposits to be exact. Yet it still receives the full government guarantee for all deposits. SFIs are also subject to slightly less stringent, though similar, capital adequacy requirements of the Bank of Thailand, so they have proportionately more funds to underwrite loans and put into other investments.
None of these SFI "privileges" is unique to the GSB, but why is the GSB so successful in raising funds, and maintaining its liquidity? The answer lies with its main products, the GSB lotteries, which are attractive to depositors in many aspects. Of course, this is another huge advantage the GSB has over commercial banks, which are forbidden by the central bank to use draws or prizes to sweeten their deposit product offerings.
Demystifying the GSB lotto: The GSB says its lotteries, officially known as Premium Savings Certificates (PSCs), are a "novel" alternative to conventional savings. Simply put, a PSC is a hybrid of a straight savings account and a simple lottery. A PSC payment consists of a guaranteed (fixed) interest rate from the saving account, plus a variable return from prize draws. The former currently ranges from 2% to 2.86% per year for a three-year maturity depending on how much you deposit, while the latter averages well above 10% of the outstanding amount, taking into account the probability that nothing is won.
This characteristic puts a PSC in between the government lottery and a time deposit (TD) on the risk-return ladder, with the lottery potentially giving highest return at a cost of being the riskiest of the three, and the savings account being the safest. By their very nature, there is no absolute ranking to determine whether one product is better than another; in other words, in order to achieve a higher rate of return, one must necessarily incur higher risks. The optimal choice for the consumer thus becomes a matter of individual preferences.
An individual who buys lottery tickets is more likely to be risk-loving as he or she is willing to accept one-in-a-million odds of winning the jackpot of 2 million baht, or 50,000 times that of the ticket price (40 baht). But lotto payments are all-or-nothing, and on the whole a lottery is bound to lose 43% of its value on average. Statisticians call this an expected value. A risk-averse individual, on the other hand, is likely to be more satisfied with a promised payment of 3.25% on a time deposit that has zero or close to zero risk: nothing more, nothing less.
The difference between the TD and the PSC rates, which ranges from 0.39 to 1.25 percentage points, is therefore the price of entering the GSB prize draws. Whether this is a good price to pay can be very subjective, and even the most risk-averse of us may believe that under certain circumstances that it's worth it. Of course, risk preferences are not set in stone, and after all we, unlike "pure" homo economicus, can be influenced by other cues.
Psychologists believe that people make judgements about the probability of events by the ease with which examples come to mind; or in simpler language, out of sight, out of mind and vice versa. In other words, our subjective assessment of winning a prize draw may be skewed upward by the "visibility" of the top prizes. The GSB's three 10-million-baht prizes exert far more pull on us than the government lottery's mere 2-million-baht prize.
This is how the GSB works its magic.
On careful analysis, however, the expected value of the GSB's first prize is approximately only two-hundredths that of the state lottery's first prize! But frankly, who would bother calculating those probabilities, still less finding the corresponding expected values?
The 2-trillion push: The PSCs are powerful weapons which are particularly useful when the GSB needs to raise a higher-than-average amount of funds. The bank is expected to rev up its funding starting this month _ potentially raising between 300 billion and 500 billion baht this year. This is a staggering amount, comparable to what it raised in 2009 to cover its targeted loan growth. But why would the GSB need the extra funding this year?
Yes, we are talking about financing the 2-trillion-baht government megaprojects which will raise most of their funds domestically. Both the finance minister and the GSB's chief executive agree that the bank should participate, if not take centre stage, in funding government infrastructure plans.
Of course not all 2 trillion baht will come from the GSB; the government will also issue bonds and borrow from other banks. But as it currently stands, the GSB is the only SFI capable of such a commitment. The Bank for Agriculture and Agricultural Cooperatives (BAAC) is currently tied down with financing the massive rice-pledging scheme, while other SFIs are either in liquidity trouble or too small to be meaningful.
When the GSB decides to raise funds from its highly popular lotteries, commercial banks worry. Past performance has shown that increases in funding for the GSB typically result in fierce deposit and funding competition among commercial banks, whether big or small. That explains why commercial banks have been introducing various deposit products early this year to woo depositors. Nothing much happens in Thai banking until the GSB moves, and now it's getting ready to step on the gas pedal.
TMB Analytics is the economic analysis unit of TMB Bank. Behind the Numbers is co-authored by Benjarong Suwankiri and Warapong Wongwachara. They can be reached at TMBAnalytics@tmbbank.com