Do state Specialised Financial Institutions really work?
Since the 1997 Asian financial crisis, the Thai state-owned specialised financial institutions (SFIs) have gone through a remarkable expansion.
Their share of outstanding loans (consumer and business borrowing) jumped from a mere 13% in 1998, to a whopping 33% in the second quarter of 2013. In 2012, half of the total value of loans extended belonged to SFIs. Private commercial banks are beginning to feel rather uneasy about the amplifying role of their state-owned peers, that can dodge strict prudential regulations of the Bank of Thailand and have access to unlimited financial backing by the state.
The main justification for state intervention in the credit market is the presence of the "SME financial gap". Commercial banks are often loath to extend very small loans that are administratively costly and SMEs themselves often lack collateral, sound financial statements and convincing business plans to help secure a loan. So, how have Thai SFIs contributed to the closing of the aforementioned financial gap? My research last year found that only 5% of roughly 2.75 million SMEs had access to financial facilities provided by two SFIs mandated to provide financial access to small business.
These are the SME Bank, which extends business loans, and the Thai Credit Guarantee Corporation (TCGC), which provides guarantees for loans extended by private commercial banks.
Another 35% of SMEs can secure loans from commercial banks, while the remaining 60% still do not have access to any form of financial services. These numbers reveal that SFIs have not yet made a dent on the gaping financial gap of Thai SMEs.
The next question is how much did it cost taxpayers to provide credit access to the 140,000 SMEs in 2012? The study reveals that the figures are roughly 320,000 baht per loan for the SME Bank, 40,000 baht per loan for the TCGC and nothing for the Exim Bank.
The relatively high cost of SME Bank's loans is due to the extremely high NPL (non-performing loans) ratio of 32%, compared with the NPG (non-performing guarantee) of only 3.7% for the TCGC. The stark discrepancy in the NPL ratio between the SME Bank and the TCGC clearly reflects the inferior quality of SME loans extended by state-owned banks compared with those extended by commercial banks but guaranteed by the TCGC.
To what extent are these costs borne by taxpayers justified? The annual state-enterprise performance evaluation scheme conducted by the Ministry of Finance gives relatively small weight to assessing the impact of SFI-assisted loans, focusing more on SFIs' financial performance, internal efficiency and the "fulfillment of government-mandated projects", most of which characterise "relief programmes" rather than "SME business loans".
These include, for example, loans targeted at SMEs affected by political unrest or natural disasters, or SMEs that have been unable to service debt. As a result, it is not possible to determine whether the money is well spent.
To conclude, SFIs' contribution to closing the SME financial gap in Thailand is still limited in terms of coverage and can be very costly when the government does the lending itself (through SME Bank) rather than relying on private commercial banks' lending mechanism. The absence of an impact evaluation scheme means that there is little accountability in the system.
Going forward, the government may consider several measures or policies that can help improve the efficiency of state intervention in the credit market. First, it should consider the role of a guarantor instead of a creditor and promote the use of credit guarantees to reach out to smaller SMEs by working out a risk-sharing scheme with private commercial banks.
Second, to promote greater accountability, it needs to conduct a thorough impact analysis of SFI loans.
Third, to ensure the soundness of SFIs' activities, the government should subject state-owned banks and financial institutes to the same regulatory standard as commercial banks do, perhaps with some marginal flexibility to justify their non-commercial mandate.
Last, but not least, these SFIs need to have a long-term direction in their lending rather than the one-off politically motivated programmes that come and go with frequent changes of government, which leave SME financing of the country aimless at best.
SMEs are the "new shoots" of the economy which, with proper nurturing, can churn out invention and innovation that are the foundation of economic strength. A revision of the state's role in providing financial assistance to SMEs can help make a difference in moving our economy forward.
Deunden Nikomborirak, PhD, is Research Director for Economic Governance, Thailand Development Research Institute.