Good governance sorely lacking at state-run banks

Good governance sorely lacking at state-run banks

Loss-making IBank advertised its services at the Money Expo 2017 in Bangkok. The Finance Ministry bailed out IBank and some other state-run financial institutions in the past. (Photo by Patipat Janthong)
Loss-making IBank advertised its services at the Money Expo 2017 in Bangkok. The Finance Ministry bailed out IBank and some other state-run financial institutions in the past. (Photo by Patipat Janthong)

During parliamentary debates on the Prayut Chan-o-cha government's policy statement, scheduled for tomorrow and Friday, the state-run Krung Thai Bank's (KTB) 9.9-billion-baht loan scandal will likely be taken up by the opposition targeting one cabinet member, Finance Minister and Palang Pracharath Party (PPRP) leader Uttama Savanayana. When the loan was approved in 2003, Mr Uttama was an executive board member of the bank.

He was also a witness during a court trial of a corruption case involving the loan scandal.

Without a doubt, the good governance of state-run financial institutions is a crucial matter. It affects efficiency of these institutions. However, many of them have suffered large financial burdens in recent years, demonstrating their lack of good governance. The problem in part was driven by intervention in these institutions by ruling governments.

The KTB loan, granted to affiliates of Krisdamahanakorn Group, reflects a culture of irresponsible management at state-run financial institutions, which usually involves conflicts of interest. Other state-run banks also have tainted records of either failed management or corruption that have cost the state billions of baht in revenue.

Should there be effective measures in place to ensure efficiency and good governance of state financial institutions?

The opposition's debate on the KTB loan case will likely centre on whether Mr Uttama's qualifications as a minister meet the constitution's requirement for them to have demonstrated honesty and integrity. In the court trial, Mr Uttama was a witness in the KTB's approval of a long-term loan of 8 billion baht for Golden Technology Industrial Park, an affiliate of Krisdamahanakorn Group. It was part of the 9.9-billion-baht loan.

In 2005, the Bank of Thailand accused KTB executive board members of approving the loan without deliberating the company's financial status, credit risk, non-performance risk and surety value.

The KTB board's approval of the loan to Golden Technology Industrial Park was in fact flawed. The 8-billion-baht sum was intended to be paid to Bangkok Bank as a debt settlement to free the company's land plots that had been used as collateral. However, the Bank of Thailand (BoT) found out that only 4.44 billion baht was paid to Bangkok Bank and the rest -- 3.55 billion baht -- went into the personal bank accounts of some individuals.

Other financial institutions have also been tainted with records of inefficiency and a lack of good governance by approving loans, which later ended up as non-performing loans (NPLs) totalling billions of baht. The state in return had to inject taxpayers' money to bail them out.

For example, the Finance Ministry a few years ago had to raise the registered capital of Islamic Bank of Thailand (IBank) by injecting almost 20 billion baht into the bank which had accrued 50 billion baht of NPLs (accounting for half of its outstanding loans). The ministry earlier also injected 4 billion baht into SME Bank, which had accrued more than 40 billion baht of NPLs (also making up 50% of its outstanding loans).

Therefore, there is a need for strict supervision and regulatory systems to prevent corruption or conflicts of interest in these institutions.

The Finance Ministry, as the major shareholders in many of them, earlier realised a conflict of interest on its part for assigning its people to sit on the boards of state-run banks while giving itself the job of examining and evaluating these institutions. As a result, it later handed over the task of examination and evaluation to the BoT.

The first Prayut Chan-o-cha government also pushed for a law on development, supervision and management of state enterprises which came into effect in late May. The new law stipulates the process for selecting executive board members of state enterprises.

Executive boards of state enterprises play a key role in promoting efficiency and transparency of their organisations. In the past, they have been vulnerable to intervention by politicians from ruling governments.

The new law requires that a committee to screen candidates for executive board members of state enterprises must be comprised of former executives of state agencies, such as a former BoT governor, along with candidates from the private sector. This means current executives of state agencies will not be allowed to serve on the screening committee. The new structure can help avoid conflicts of interest and intervention by politicians.

It may be too soon to judge whether this new mechanism can prevent conflicts of interest and political intervention. As a result, public scrutiny is still crucial to keep the management of these organisations as transparent as possible.

Currently, the operational size of many state-run banks is larger than that of commercial banks. They have played a more prominent role in driving the country's economy and even reducing poverty.

Wichit Chantanusornsiri is a senior economics reporter, Bangkok Post.

Wichit Chantanusornsiri

Senior economics reporter

Wichit Chantanusornsiri is a senior economics reporter, Bangkok Post.

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