State bank woes lead to revision

Ministry urges greater transparency, refocus

The ongoing financial problems at the Small and Medium Enterprise Development Bank of Thailand (SME Bank) and the Islamic Bank of Thailand (IBank) have prompted a rethink by the Finance Ministry of its supervisory and surveillance procedures for state-run specialised banks.

People queue to use an ATM at the Islamic Bank’s head office in Bangkok last week. The Finance Ministry is struggling to supervise ailing state banks. PATTARACHAI PEECHAPANICH

Policymakers say greater transparency and a refocus on the original intent of state-run specialised banks will be the main priorities in the restructuring.

SME Bank and IBank rank among the weakest financial institutions in the country, with both plagued with billions of baht in distressed loans and capital-adequacy ratios well below minimum international standards.

Transparency, internal controls and lending standards have been an ongoing problem at a number of state-controlled financial institutions. For example, Secondary Mortgage Corporation (SMC), an institution set up to encourage the development of mortgage securitisation in the country, in the past has been found to have overvalued asset collateral or purchased mortgage assets taken by nominees with no capacity to service their debt.

SME Bank's current problems, meanwhile, date back several years and include questionable accounting practices that understated the levels of non-performing loans (NPLs) at the bank. Policymakers were alerted to the problems only following a special examination by the Bank of Thailand at the Finance Ministry's request.

Areepong Bhoocha-oom, the finance permanent secretary, said checks and balances must be strengthened within the credit approval process at state-run banks.

''The Finance Ministry is drafting a plan to overhaul the supervisory regime for specialised state-run banks, particularly in terms of credit approval procedures, which have lacked transparency and been a primary factor in the high levels of NPLs at certain banks,'' he said.

Mr Areepong said the question of transparency has become a major issue at certain state banks, particularly those with asset quality problems such as the IBank.

IBank, set up in 2003 to provide financial services in compliance with shariah law, as of last November reported NPLs of 24.6 billion baht or 22.59% of total outstanding debt.

But using the more stringent criteria governing commercial banks under Bank of Thailand regulations, bad loans at IBank would be as much as 39 billion baht or 30% of outstanding debt.

SME Bank is in even worse straits, with the latest figures putting bad loans at the bank at 39 billion baht or 40% of total outstanding loans.

Mr Areepong said the Finance Ministry, as the regulator of specialised state-owned financial institutions, said the fundamental purpose of these banks is to provide financial services and credit to customers otherwise unserved by commercial banks.

SMEs, small-scale exporters, rural businesses and small-scale farmers are all market segments now served by state-run banks, some set up decades ago at a time when the country's private banking sector was still in its infancy.

Mr Areepong said some market segments received state support as part of a broader economic development policy. While top-credit small businesses can generally easily access commercial banking services, weaker businesses often have little options outside of state-run institutions willing to accept higher credit risk.

He said other countries offered similar policies, citing South Korea, which used state banks to support small businesses directly despite the higher credit risks and prospects of loan losses.

''While the risk of losses are higher, if you look at the bigger picture and the potential value created for the country, then it becomes a worthwhile risk,'' Mr Areepong said.

''But Thailand has not reached that point, as we still face questions regarding transparency [in lending operations].''

Somchai Sujjapongse, director-general of the Fiscal Policy Office, agrees specialised state-run institutions should focus their lending operations on customer segments that cannot easily access financial services from the private sector.

''For instance, [state banks] should focus their small business lending to those requesting credit of less than 10 million baht, a group that generally faces greater difficulties in requesting loans from private banks than larger businesses,'' he said.

At IBank, of the 24.6 billion baht in claimed bad debt, as much as 90% represent loans to just 100 large companies, a sign that the bank's rapid lending growth over the past several years has been driven by corporate lending rather than retail or small business expansion.

Finance Ministry officials say state banks must reduce their direct competition with private commercial banks and refocus operations on their original mandate to serve fringe groups outside of mainstream banking.

Surveys by the Bank of Thailand show as much as 9.6% of the public either cannot or have not tried to access ordinary banking services, a group the ministry wants to become the primary target of specialised state banks.

Performance reviews for state banks will also be fine-tuned for a better matching of incentives with targets. For instance, executives will be judged by not only profitability but also how successful lending activities are directed at target groups such as small businesses set up within the past three years.

About the author

Writer: Wichit Chantanusornsiri
Position: Business Reporter