IFRS 9 limits GSB's lending to the poor

IFRS 9 limits GSB's lending to the poor

Standard requires higher loan reserves

GSB president and chief executive Vitai Ratanakorn.
GSB president and chief executive Vitai Ratanakorn.

Loan provisions under International Financial Reporting Standard 9 (IFRS 9) will likely make lending to grassroots parties more difficult, according to the Government Savings Bank (GSB).

Although the Finance Ministry has delayed the adoption of IFRS 9 until 2025 and ordered the Fiscal Policy Office to study appropriate ways to help state-owned banks with their mission to help those facing obstacles to accessing credit in the commercial banking system, the latest accounting standard is likely to make it more difficult for the bank to provide loans for social causes, said GSB president and chief executive Vitai Ratanakorn.

Mr Vitai said this is because of different accounting standards under IFRS 9.

For example, under the current accounting standard, a bank would have to reserve 1% of a loan worth 100 baht for expenses. But if the loan became overdue for a period of 90 days or became classified as a non-performing loan (NPL), the bank would have to raise its reserve from 1 baht to 100 baht.

However, on a 100-baht loan, there is a 70-baht loan guarantee, so the bank would only need to reserve the difference (the unsecured portion), which would be 30 baht in this case.

Mortgage lenders have little or no reserve at all because there is loan collateral for the debt.

Under IFRS 9, a 1-baht loan reserve would not be required on a 100-baht loan as the reserve is based on the actual risk of each loan category.

For example, if a 100-baht loan in a particular loan portfolio had a history of 20% bad debt, the bank would have to reserve 20 baht from the day the loan is approved.

Mr Vitai said when considering the bank's net interest margin (NIM), for example, at 2% of a loan category, a double-digit loan-loss reserve would not provide a break-even point within a five-year loan period.

In this case, it would take at least five years for GSB to recover its loan-loss reserve on the loan, and the bank would not generate any profit during that period, he said.

NIM is a measurement that compares the net interest income a financial firm generates from credit products like loans and mortgages, with the outgoing interest it pays holders of savings accounts and certificates of deposit, according to Investopedia.

As well as the risk of accumulative losses, state-owned banks would find it harder to help the poor under IFRS 9 because of the risk factor, said Mr Vitai.

Commercial banks do not usually want to offer loans to grassroots organisations because there is a high level of repayment risk associated with this client group, but state-owned banks have a duty to assist them through loans.

At present, the GSB has set aside 75 billion baht in reserves, representing 125% of capital as a buffer against NPLs.

If the bank were required to set aside its reserves to be in line with IFRS 9, another 50 billion baht would have to be allocated to the reserve portion, he said.

The IFRS 9 guideline on risk factors not only applies to future debts, but also to the bank's existing total debts of 2.1 trillion baht, said Mr Vitai. This is the reason why all commercial banks have seen a decline in profits for several years, he said.

GSB has total assets of 2.8 trillion baht.

The bank has total outstanding loans worth 2.1 trillion baht, with 2.5 trillion in total deposits.

The NPL ratio stands at 2.48% of total outstanding loans.

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