For SME and Islamic banks, what went awry?
Plainly speaking, it's been a complete management failure, both inside and out. How else can one frame the fact that two state-controlled banks, the SME Bank and the Islamic Bank of Thailand, are now wrestling with bad loans in excess of 80 billion baht, or over one-quarter of their total outstanding loans? When we consider the fact that their peers in the private sector count their own non-performing loans in the low single digits, and that Thai bank profitability overall is at record highs, the performance of these two institutions looks even worse.
One can buy and build quite a bit for 80 billion baht, whether it be schools for children, hospitals for the infirm or new roads and railways for commuters. Who should be held accountable? I think it's a collective failure, whether it be the executives and directors of the two banks, the political leadership which appointed both or the Finance Ministry officials tasked with supervising the institutions. All should answer to the public, and explain why we do not have new schools, hospitals or roads today.
Ministry officials and bank executives argue that the actual losses are likely to be less. No doubt. But even assuming that 50% of the dud loans can be reclaimed _ 24.6 billion baht at the Islamic Bank, and 39 billion at the SME Bank _ we are still talking about taxpayer losses amounting to tens of billions of baht.
Ultimately, taxpayers, small businesses and observant Muslims will all have to share in the burden for the past transgressions at both institutions, as resources better applied to helping start-up companies or credit-starved institutions in the troubled southern provinces must be diverted to cleaning up the garbage from the past.
Why? Are Muslim borrowers, receiving financial credit under strict shariah law, inherently more risky than borrowers at any other bank? I think not. And while small businesses may in fact pose a greater risk than other types of credit, the fact remains that plenty of other banks in the country are able to manage their own lending portfolios to the same type of clients profitably and sustainably. Yes, the SME Bank may not and should not focus only on the strongest, best-run businesses, a segment that can easily access credit from private banks. But seeing over one-third of your loans default points to deeper problems in risk management, credit analysis and internal controls, problems which if not addressed, will only resurface again in the future.
If one summarises the problems at the institutions, we see conflicts in terms of policy direction, internal fraud and corruption and management inefficiency at the board, senior executive and staff levels. During the 1997 crisis, many Thai banks encountered similar troubles, and have spent considerable time and resources over the past two decades to raise their overall standards and productivity. Pity that those tasked with managing the SME Bank and the Islamic Bank seem to have ignored the lessons of history.
The Finance Ministry, which ultimately holds regulatory and supervisory power over the specialised state-run financial institutions, says it will overhaul its entire framework for banks such as the SME Bank and the Islamic Bank. Both must refocus on their original mandates, which for the SME Bank means a focus on small businesses seeking credit of less than say 10 million baht and for the Islamic Bank, a concentration on retail clients.
Looking at the policy shift in a different way, one might conclude that the emphasis on small businesses and retail clients is aimed at minimising potential losses in the future. After all, one poor decision by a corporate banker for a single client might represent the equivalent of losses for thousands, or even tens of thousands, of consumers or small business customers. Unsaid also is the fact that it's always easier for the ill-at-heart or the politically connected to interfere or sway the decisions involving one customer than it is for thousands.
One can find numerous instances of fraud or poor decisions at both the SME Bank and the Islamic Bank that have contributed to the current problems, whether it be cases of inflating collateral pledged against loans or relaxing lending standards against official policy. In any case, both institutions are in financial trouble, and there is little doubt that if they were private banks supervised by the Bank of Thailand, they would likely already be closed and headed for bankruptcy. Consider that the SME Bank's capital adequacy ratio, a measure of how much capital exists to serve as a buffer for loan losses, stands at a negative 0.95%, compared with the minimum 8.5% level required for private banks.
In any case, the final chapter for both banks has yet to be written. The public deserve a proper accounting at both institutions, including how the current troubles began, who was responsible and how a repeat will be avoided in the future. Public officials are understandably wary about discussing either bank, knowing that doing so may only further hurt public confidence. Banks after all fundamentally depend on public trust as their lifeblood. But I think in this case, honesty and transparency, two commodities which have been all too lacking in dealing with both the SME Bank and the Islamic Bank, are sorely needed. Avoiding discussion about the problems doesn't alleviate the fact problems, serious problems, remain. The public didn't create the troubles at these banks, but now must shoulder the cost of fixing them. It's only fair that we know why.
Wichit Chantanusornsiri is a senior business reporter for the Bangkok Post.
Senior economics reporter
Wichit Chantanusornsiri is a senior economics reporter, Bangkok Post.