The Ministry of Finance is preparing to look for ways to help state-owned financial institutions which may be affected by the adoption of new financial reporting standards that are set to take effect in 2025, says permanent secretary Krisada Chinavicharana.
The 9th edition of the Thai Financial Reporting Standards (TFRS 9) will require state financial institutions to set more reserves than before which may affect their financial position, particularly small banks and banks with a high level of non-performing loans (NPLs).
As a result, the ministry is planning to seek a consultation with the Bank of Thailand for guidance and measures to relax the terms and conditions of TFRS 9.
According to the TFRS-mitigation measures, the ministry plans to propose using funds from the Specialised Financial Institution Development Fund (SFIF) to contribute to the state banks which need to increase their reserves according to the new financial reporting standards.
The SFIF was established by the Bank of Thailand Act 1942 to provide funds for the purpose of reconstructing and developing the financial institution system to accord its strength and stability by stipulating that state financial institutions contribute 0.25% of their deposits to the SFIF.
Nevertheless, the ministry will allow state banks to delay the adoption of the new financial reporting standards until 2025 and assign the Fiscal Policy Office to find appropriate ways to help sustain state banks which provide easier access to funding compared to commercial banks which may be less accessible.
The new financial reporting standards make the issuance of loans more difficult as they stipulate that the bank must immediately reserve 1% (or one baht) for every 100-baht loan and must increase the reserve from one baht to 100 baht in the case of overdue loans of more than 90 days or NPLs.
However, if this same 100-baht loan is a secured loan backed by collateral worth 70 baht, the bank will initially set the reserve at one baht.
However, if it turns into an NPL, the bank will reserve only the difference (in the unsecured part) for 30 baht. Thus, the reserve will be less for NPLs backed by high value collateral. This means that banks offering mortgage loans need little or no reserves at all as the collateral is worth the debt.
The new financial reporting standards would no longer require the reserve of one baht for a 100-baht loan, but the reserve would be based on the actual risk of each type of loan. For example, a 100-baht loan with a history of 20% bad debt would require a reserve of 20%.
This means that a bank with an unsecured loan with 10% reserve and a net interest margin of only 2% would fail to break-even within five years.
As a result, the new standards would impede loan offerings by state banks, including commercial banks which are more risk averse due to a lower interest margin. Furthermore, the new standards are not only applicable to banks' future loans, but also cumulative current loans.