Yet economic uncertainties made the year one of consolidation rather than growth. While personal finance and housing loans showed considerable expansion, corporate finance remained stalled, as banks adopted a more prudent, defensive posture in the face of heightened risk.

The government, under the philosophy that economic recovery is difficult to achieve unless banks resumed lending, adopted a multi-prong strategy to help break the deadlock.

ASSET QUALITY GAINS

The state-owned Thai Asset Management Corp was set up and began operations in the fourth quarter, accepting the first of what will ultimately be more than one trillion baht in assets from private and state banks.

In October, 577.3 billion baht in assets were transferred to the TAMC, priced at book value net of collateral and exchanged for 10-year notes.

The biggest beneficiaries of the TAMC programme have been state banks. BankThai, for instance, saw its bad loans in October drop by 47% to 5.5 billion baht following transfers, or just 3.44% of outstanding loans.

Finance Minister Somkid Jatusripitak, right, and his deputy, Varathep Rattanakorn, have their heads together as the Senate debates the Thai Asset Management Corporation bill on Sept 14.

At Krung Thai Bank, bad loans fell to 56.4 billion baht, or 7.27% of total loans, from 162 billion, with another 30 billion in assets expected to be transferred in a second round.

Siam City Bank and Bangkok Metropolitan Bank, both of which saw their major shareholder changed to the Government Pension Fund, were completely cleaned up.

Private banks also saw some benefits from the TAMC programme, with Bangkok Bank the biggest winner with some 60 billion baht in loans transferred. Siam Commercial Bank, Thai Farmers Bank and Thai Military Bank all saw their non-performing loans fall by around five percentage points of their total loans through transfers in October.

The discrepancy between state-owned and private banks regarding eligibility for TAMC transfer stemmed from the very structure of the organisation.

For the private banks, only bad loans as of the end of 2000 involving multiple creditors were allowed. Profits _ or losses _ will be split with the state after five years, a condition aimed at limiting the ultimate costs incurred by taxpayers under the programme.

State banks, of course, had no such condition, as losses on bad loans would have to be taken by the central bank's Financial Institutions Development Fund, and thus taxpayers, regardless.

But policymakers expressed confidence that by pooling creditor claims into a single vehicle armed with extraordinary powers to push forward with debt negotiations, progress would be made in corporate and industrial restructuring with more efficiency than if each creditor was allowed to pursue their own claims and interests alone.

Overall, non-performing loans are estimated to fall to around 12% of total loans by the end of 2001, compared to around 17-18% at the end of the year before.

SPURRING LOAN GROWTH

Yet even with the declines in bad loans, and the accompanying decline in new provisioning needed by local banks, new lending overall remained stalled.

According to the Bank of Thailand, outstanding bank credit as of October stood at 4.54 trillion baht, a decline of 5.2% from the year before. If excluding write-offs and transfers to asset management firms, outstanding credits stood at 5.33 trillion, a slight increase of 0.3% from the year before.

Bankers said that lending growth was unlikely to pick up in the short-term, as healthy firms increasingly turned to the bond markets or internal cash flow to meet financing needs and the weakest firms remained overleveraged and fraught with credit risks.

Industrial overcapacity, a weaker global market and slow gains in domestic consumption have also limited demand for loans.

What loan growth has occurred for private banks has been focused mostly in the personal credit and home mortgage market.

State banks are another matter. The government clearly sent signals to each of the four major state-banks that with their balance sheets cleaned up, they were expected to serve policy and boost their loan books, whether it be to small and medium-sized enterprises, state-supported infrastructure programmes or to targeted lending to strategic industrial sectors.

Krung Thai Bank, with the largest branch network in the country, announced a community banking programme similar to the People's Bank microfinance scheme run by the Government Savings Bank.

The community banking scheme, implemented as a pilot project by Krung Thai in the second half of the year, offers up to 50,000 baht in loans per applicant using personal guarantees to help finance new business start-ups.

Krung Thai, Siam City Bank and Bangkok Metropolitan Bank also announced programmes to lend to the newly unemployed or new graduates at interest rates of about 1% a month.

Retail customers gained in importance as banks remained wary of corporate lending, fearing more bad debtors.

Siam City Bank alone expects to lend to some 100,000 people under the programme in 2002. Loan programmes, which include credit to open new business franchises or start independent businesses, have a grace period of five months for applicants.

Bangkok Metropolitan Bank announced similar loans, as well as credit for Thais working overseas or for new retail shop owners. Loans carry terms of up to three years, at interest of around 1% a month and amounts up to around 25,000 baht.

Krung Thai Bank announced a loan programme offering up to 100,000 baht at annual interest of 12% for people starting new careers. The programme is limited to people who have undergone vocational skills training organised by the government.

Overall, the state banks were able to lend near or over their original growth targets, led by Krung Thai with 90 billion baht in new loans approved and disbursements of around 30-40 billion. While approvals were well in excess of the original target of 50 billion baht in new lending, most of the new loans have represented small and medium-sized enterprises refinancing existing liabilities from other banks.

By December, Bangkok Metropolitan Bank had approved some 10 billion baht in new loans, just off the target of 11 billion for the year, although disbursements remained a relatively low 40%.

For the private banks, only Thai Military Bank was able to see significant growth, with net loan growth of around 20 billion baht for the year or around 10%. Market leader Bangkok Bank saw a net contraction in its loan book for the year of around 2%, with Siam Commercial Bank posting a decline of 4%.

With the corporate sector still weak, most banks focused on strengthening their retail franchises, whether it be in personal lending, credit cards, or new technology initiatives such as ATM banking, mobile and Internet banking.

INTERNAL REFORMS

Local banks in 2001 also continued with internal changes and reforms aimed at improving efficiency and avoiding the mistakes made in the mid-1990s.

Development and implementation of risk management systems was an ongoing priority for banks seeking to improve monitoring of market risks and more accurately price services.

Downsizing of staff counts and branch networks also continued steadily for a number of banks seeking to improve margins and reduce costs.

Bangkok Bank, which expects its business transformation programme to be completed in 2002, moved to split services and back-office management of customers based on account size. Credit approval functions were centralised with regional hubs, with branches transformed into primarily marketing channels to reach out to customers.

Thai Farmers Bank implemented a similar restructuring, with branches split into different functions based on customer orientation, with new departments overseeing in-store branches, affluent banking centres and commercial banking centres.

Thai Military Bank announced that it would close loss-making branches and focus instead on new kiosk branches at educational institutions, a strategy aimed at helping future growth of the bank's customer base.