A man walks past a credit card counter at a shopping centre in Bangkok. The Bank of Thailand set an 18% ceiling on credit card interest rates for both bank and non-bank lenders late in October after complaints of excessive charges.

State banks moved aggressively to increase new lending, in line with government policy. All banks, private and state-owned alike, also sharply increased their efforts in the consumer market, leading to a boom in credit cards, personal loans and hire-purchase lending.

The year 2002 also saw another bank vanish from the system, following the merger early in the year between Siam City Bank and Bangkok Metropolitan Bank, two institutions taken over by the central bank's Financial Institutions Development Fund over the course of the crisis.

The newly merged entity, using the name Siam City Bank, will become the country's fifth largest in terms of assets at more than 490 billion baht, with more than 370 branches nationwide. The consolidation brings the number of banks in the financial system to 12 commercial banks, plus Thanachart Bank, a restricted bank formed by National Finance Plc.

Although both local commercial banks and foreign banks managed to extend more new loans this year, many continued to struggle with the legacy of non-performing loans built up during the crisis.

Top-grade corporate clients also turned more to the bond markets for capital, forcing many banks to focus more on middle-tier borrowers.

RETAIL BANKING

The credit card industry in 2002 enjoyed huge growth and also huge competition. Outstanding cards at the end of September totalled 3.2 million, compared with just 2.6 million at the end of 2001. Credit outstanding at the end of September was 51.6 billion baht, compared with 38.6 billion at the end of 2001.

The Bank of Thailand made two major changes affecting the card industry in 2002, with the first coming in May when minimum salary limits for card applicants, previously set at 15,000 baht a month, were scrapped, immediately increasing the pool of potential cardholders.

Krungthai Card Plc, a subsidiary of Krung Thai Bank, promptly changed its minimum salary requirement to just 7,500 baht, a level used by non-bank issuers such as GE Capital and Aeon Thana Sinsap. Other banks announced they would consider also relaxing salary requirements for card applicants, although most maintained levels at around 10,000 baht.

The sharp increase in cardholders and spending, while giving a welcome boost to retailers and the economy, raised fears among some economists of potential debt troubles in the future. Several politicians, responding to complaints by consumers of high penalty rates and unfair treatment by card issuers, argued that new controls on the card industry were needed.

On the other hand, local banks, while supporting moves toward deregulation, sought a uniform regulatory framework that could be applied for bank and non-bank issuers alike.

In November, the Bank of Thailand and the Finance Ministry responded by announcing a new framework for the credit card industry, including maximum fees for various services and a cap on interest rates at 18% per year.

The ruling applied to credit cards issued by both banks and non-banks, although cards issued by department stores were excluded.

Non-bank issuers were required to apply for licences from authorities.The change also caused some non- bank issuers such as Easy Buy to scrap their plans to issue their own credit cards.

Importantly, most foreign banks that normally charged high fees on their credit card services, such as Citibank and Standard Chartered, suffered adverse impact on their revenues from the change.

Consumer loans also enjoyed strong growth in 2002.

Hire-purchase lending, whether for white-goods, electronics and home appliances, enjoyed strong growth led by firms such as First Choice or Power Buy.

Local bankers estimate that consumer loans now account for around 12% of bank lending, compared with just 10% after the crisis.

Housing loans, which was one of the most active areas of bank lending in 2000 and 2001, slowed in 2002, despite continued robust growth in the housing market.

Heavy competition among lenders resulted in numerous bargains available for new home buyers, with many banks offering a wide variety of fixed and floating-rate loans to meet financing needs.

BANCASSURANCE

Bancassurance, or insurance products offered via banks, grew steadily through the year as institutions sought to expand their fee-based income.

Bank of Asia signed an agreement with market leader American International Assurance Co to offer insurance products through the bank.

Krung Thai Bank's Islamic operation was opened in Narathiwat in mid-July. It had 1,600 deposit accounts totalling 25 million baht as of the end of September. In addition, the Islamic Bank of Thailand is scheduled to open next month, with the aim of mobilising funds totalling 50 billion baht within five years.

Standard Chartered Nakornthon Bank announced that it would set up special counters at its branches to sell products from a variety of insurers.

Siam Commercial Bank and New York Life Assurance Co announced a programme to sell simple insurance products initially at the bank's branches in Bangkok, eventually to expand upcountry.Thai Farmers Bank and some state banks were conducting feasibility studies on bancassurance services in order to develop the most appropriate bancassurance products.

On the marketing side, with most banks shifting their focus to retail customers, the banking system experienced a sharp increase in marketing and promotion activities.

For example, Bank of Ayudhya introduced a number of creative marketing campaigns including use of information technology in promoting its financial products.

As well, its ATM card holders can now reserve seats in movie theatres by making payments through the bank's ATM network.

In another significant move, banks placed greater emphasis on market segmentation by having direct-sales teams pursue selected niche markets.

For example, Thai Farmers Bank established direct sales teams that focused on large-scale and retail customers

Teams dedicated to retail customers focused on housing loans, credit card and consumer loan products.

Chatchai Payuhanaveechai, senior vice-president of Thai Farmers Bank's consumer loans department, said that the direct sales teams had helped to double the number of the bank's borrowers

As a result, it planned to double the number of direct sales teams next year.

Thai Farmers Bank is also planning to revive its ``e-Girls'' campaign in 2003 to promote increased use of electronic and online channels, according to Charcree Tirachuli, a senior vice- president of the bank.

An earlier two-year campaign, involving eight presenters chosen from among hundreds of applicants, proved to be a major success.

However, the budget for the next promotion was expected to be lower since the public was now well acquainted with the e-Girls idea, said Mr Charcree.

On the expansion front, most banks focused on opening low-cost, high- tech kiosks and mini-branches.

The pace of closures and mergers of underperforming branches slowed.

After five years of organisational restructuring, including cutting expenditures on staff and branches, making additional provisions for loan losses, and improving information technology, banks are placing stronger emphasis on fee-based income.

In addition, the two rounds of cuts on interest rates on deposits helped the banks to increase interest rate spreads.

However, the volatility of external factors had forced many banks, particularly Thai Farmers Bank and Siam Commercial Bank, to make additional general reserves well above the minimum requirements imposed by the central bank in order to accommodate the higher risks caused by volatility.

In the third quarter of 2002, Krung Thai Bank had general reserves of two billion baht.

An analyst at Capital Nomura Securities estimated that the combined net profit of the Thai banking system would amount to 24.2 billion baht in 2002 and would increase to 51.9 billion baht in 2003, mainly because of the expected sharper increase in new loans.

HIGHER CREDIT GROWTH IN 2003

Olarn Chaipravat, the former president of Siam Commercial Bank, said it was possible for the Thai banking system to register credit growth of 4% in 2003, since it was close to the expected growth of the country's gross domestic product for the year.

In comparison, credit growth for the first 10 months of this year was 3.7%.

Chartsiri Sophonpanich, president of Bangkok Bank, said credit growth next year would focus on consumer loans and credit extension to small and medium-sized enterprises.

``As the economy registers a higher growth and brings about a larger cake (for businesses), banks feel more relaxed and are willing to take a greater risk,'' Mr Olarn said.

Another supporting factor that will help improve credit growth in 2003 will be the continuing effort by the central bank to reduce levels of non- performing loans in the shortest time possible.

M.R.Pridiyathorn Devakula, the Bank of Thailand governor, said recently that as of the end of June 2002, outstanding non-performing loans in the financial system amounted to 840 billion baht.

The non-performing loans of all the commercial banks accounted for 788 billion baht.

M.R.Pridiyathorn Devakula said that the non-performing loans of 788 billion baht could be divided into four groups.

The first group, accounting for 154 billion baht, consisted of loans already restructured.

The central bank is making small amendments to its regulations, aiming at classifying those loans that were being repaid continuously as performing loans.

The central bank wants commercial banks to closely monitor the restructured loans, making sure that they become performing again within the next four months by starting first with those debtors that had only one creditor.

The second group, accounting for 253 billion baht, consisted of loans for which debt restructuring was still being negotiated.

The aim was to complete the debt restructuring of these loans within the next 12 months, with the central bank acting as a mediator.

While he declined to disclose any specific target, M.R.

Pridiyathorn believed that it would be relatively easy to reduce non-performing loans in these first two groups.

He is leading attempts to cut the level of non- performing loans in these two groups to below 10% of total credit outstanding in the categories by the end of 2003.

The third group accounting for 159 billion baht, consisted of loans whose disposition remains before the courts

The central bank would offer to act as a mediator for this group of debtors and creditors for a short period of time.

The last group, accounting for 222 billion baht, consisted of loans whose enforcement was being implemented

Although it was possible to establish a specific timeframe when all of these loans could be settled, the relevant state agencies care still in the process of amending related civil laws, aimed at expediting enforcement.