Banking and Finance

 

In today’s global banking landscape, banks must position for growth on the rebound to compete and achieve high performance.

The banking market is increasingly more competitive, but it is not without its opportunities. To grow and prosper in the new banking landscape, banks must be ready to make a change and go beyond the status quo. To succeed today in achieving high performance, banks need a renewed focus on imperatives like:

  • Rebuilding customer trust and mindshare.
  • Creating new operating models.
  • Executing effective divestitures/mergers and acquisitions(M&A).

With deep, varied experience in the banking industry, we have developed a range of business solutions, outsourcing services and software that can help our clients succeed in these and other areas.

1. Forces for change

In Thailand, the recent financial crisis was not only brought about by factors related to the economic cycle but also exacerbated by structural weaknesses in the system. A significant cause of the crisis was the massive capital inflows into the economy without effective management mechanisms. Some examples of the weak initial conditions are ineffective corporate governance, inadequate supervision and regulation, and insufficient or in some cases inaccurate disclosure which resulted in lax credit policies in banks and other financial institutions and misuse of funds in the corporate sector.

Thailand initiated its financial liberalisation efforts in the early 1990s. The first step was the acceptance of Article VIII of the International Monetary Fundís Articles of Agreement, followed by a series of deregulatory measures in the financial system. Market opening of the financial system ensued with the establishment of the Bangkok International Banking Facilities (BIBFs) in 1993, which coincided with the global trend of surges in capital flows to the emerging market economies. In July 1997, Thailand faced the worst economic and financial crisis in its recent history. In retrospect, the crisis was closely linked to the premature financial liberalisation and market opening.

Owing to the liberalisation policy and the swiftness of capital mobility in the integrated financial system, business has access to overseas funds at relatively low cost and allocated such funds for rapid expansion and other purposes; a process which was in general not subject to adequate monitoring and control. It cannot be denied that liberalisation at a time when the underlying economic strength and infrastructure were not yet well instituted posed threats to both the host country and the global market place because of the potential for contagion and systemic impacts. The following subsections list some major infrastructure components that were absent at the outbreak of the recent crisis and what has been done in order to prevent future crises.

1.1 Inadequate information system

While information on foreign borrowing through the banking system was monitored, inadequate information on non-bank private corporate foreign debt resulted in an incomplete aggregate picture of the countryís foreign liabilities. Data on sectoral allocation of credits did not show any signs of over- extension to the property or real estate sectors, and in fact funds seemed to be properly allocated to the ìproductiveî sectors. Direct lending to the property sector or real estate businesses was consistently below 5% of total lending.

However, it became apparent after the crisis that these so-called productive sectors, such as exporters, had used their BIBF proceeds to invest heavily in the property and real estate sectors, thus turning the entire business group into NPLs overnight as the baht depreciated.

Another area of information deficiency was demand and supply in the property market. During the bubble economy period, the real estate industry grew rapidly. However, developers were not fully aware until much later that supply was considerably outgrowing demand.

Systems for collecting necessary data are now in place. Thailand became the 21st country to meet the specifications of the Special Data Dissemination Standard, established in May 1996 by the International Monetary Fund to enhance the quality, integrity, availability and timeliness of comprehensive economic and financial statistics. Moreover, Thailand is in the process of enacting the Credit Bureau Act so that banks can disclose both personal and corporate loan information about borrowers without seeking the borrowerís consent.

1.2 Inability to utilise policy instruments, particularly the exchange rate

Rigidity in the exchange rate system, and the lack of political will to tighten fiscal policy in the midst of an overheating economy, sent a warning signal worldwide of the unsustainability of the countryís economic situation. Pressure was also put on monetary policy, which was further constrained by its inability to act autonomously. The high interest rate policy, in turn, encouraged further foreign capital inflows, exacerbating the already overheated economy.

Under a basket-peg exchange rate regime and volatile global capital flows, little room was available for independent monetary policy. Defending or abandoning the exchange rate peg was a difficult policy dilemma. In fact, before the float, the real effective exchange rate had appreciated in line with the US dollar. However, whether and to what extent it was overvalued was controversial, as it depends on the ìequilibriumî real effective exchange rate. If one takes the period when the current account was in equilibrium, say in 1990, as the benchmark, there was an overvaluation of 8% at most at the time of the float. However, recognising the loss in competitiveness and structural changes since 1990, such a benchmark would have been too simplistic. Nevertheless, it was felt that tampering with the exchange rate system (eg band widening) under the circumstance of intense speculative pressure and ebbing domestic confidence would have resulted in a wholesale run on the baht and prompted an immediate currency crisis. The Bank of Thailand, even with substantial foreign reserves, would not have been able to stabilise the exchange rate, given the much larger unhedged foreign currency debts of Thai corporations, which would have rushed to close their exposure on the first signs of any weakening commitment to a stable exchange rate. The decision was made to protect the exchange rate system as long as possible in order to buy time for the authorities to tackle fundamental problems in the economy and the financial sector without having to face a simultaneous currency crisis.

Such a policy decision was premised on the rationale that a devaluation of the baht would have done more harm than good for the following reasons:

  • ·  High import content of Thai export products implied that there would be only limited gains in export competitiveness.
  • ·  Large losses on unhedged foreign currency debt would result in a high number of corporate bankruptcies, leading to unemployment and consequent social problems.
  • ·  Financial institutionsí asset quality would be further impaired due to weakened corporate sector.
  • ·  Inflationary pressure would intensify through higher import costs and wage demands.
  • ·  Higher interest rates to contain inflation would make it even more difficult for weak financialinstitutions to recover.

    On 2 July 1997, however, Thailandís exchange rate system was changed to a managed float, whereby the value of the baht is determined by market forces.

1.3 Outdated legal framework

Another factor contributing to the difficult pre-crisis environment was the outdated legal and regulatory framework. The foreclosure law involved lengthy procedures that did not allow financial institutions to sell, foreclose or dispose of bad debts to stop losses. This law, as well as the bankruptcy law, has now been amended to expedite legal procedures. The new laws, especially the bankruptcy law, also facilitate the settling of cases in court as well as provide opportunities for both creditors and debtors to rehabilitate the debts for mutual benefits.

At the same time, the new Financial Institutions Act has been drafted and is currently before parliament. It will pave the way for Thai supervisors to improve their approaches in response to the changing financial environment. The draft law broadens the scope of commercial banksí financial activities by allowing them to form financial conglomerates, empowers the Bank of Thailand to apply consolidated supervision and encourages the practice of good governance. Not only can market discipline impose strong incentives on banks to conduct their business in a safe, sound and efficient manner, but it can also encourage them to allocate efficiently resources and maintain a strong cushion against future losses. Since reliable and timely information enables all stakeholders to make effective assessments, the Bank of Thailand has required financial institutions to disclose specified information following the accounting standards, which are in line with international standards.

The economic crisis in Asia in 1997 was the starting point for many countries in this region to lay down measures to solve financial sector problems. Giving foreign financial institutions an opportunity to invest in this region by, for example, forming business alliances with domestic financial institutions or buying financial institutions intervened by the government allows major international financial institutions to play an essential role in Asia.

3. Domestic mergers

In a number of countries, mergers take place in order to create synergy, reduce costs and increase the competitive edge of the merged institutions. In the case of Thailand, recent mergers were the consequences of problem bank resolution and the policy to reduce the number of smaller financial institutions. Any five or more finance companies, finance and securities companies and credit foncier companies can merge to form a restricted-licence bank, which will be further upgraded to a fully- fledged bank at a later stage.

4. Entry of foreign banks

From 1993 the Bank of Thailand authorised the establishment of the Bangkok International Banking Facilities (BIBFs) which allowed greater diversification of service providers through new international entrants. In addition, it enabled domestic banks to diversify their business towards international banking intermediation by obtaining offshore funds to lend to either the domestic market (out-in) or to the international market (out-out).

Since BIBFs are not allowed to take domestic deposits, they are subject to fewer regulations than commercial banks. For instance, BIBFs are not required to observe a minimum capital adequacy ratio. BIBFs also carry a lower corporate tax rate of 10%, as opposed to 30% in the case of banks. However, current policy does not allow new entry of foreign banks through BIBFs or full-licensed branches. Rather, foreign investors that have sound financial standing and high potential to help strengthen local financial institutions are allowed to hold more than 49% of the shares. With the relaxation of the regulation on foreign participation, five local banks out of a total of 13 banks are now majority-owned by foreign institutions.

Before the 1997 financial crisis, the domestic banks dominated the retail market through their extensive branch networks and their close relationship with local customers. Foreign banks, on the other hand, focused their businesses on wholesale customers. Nevertheless, the role of foreign banks will change significantly now that they have acquired majority shares in domestic banks. Access to retail customers is now possible. These foreign-owned banks are offering diversified financial services to their retail customers. With their experience and know-how, their shares in the retail market are expected to rise. However, this is hard to confirm, as reform of the Thai banking system is still at an early stage.

In today’s global banking landscape, banks must position for growth on the rebound to compete and achieve high performance.

The banking market is increasingly more competitive, but it is not without its opportunities. To grow and prosper in the new banking landscape, banks must be ready to make a change and go beyond the status quo. To succeed today in achieving high performance, banks need a renewed focus on imperatives like:

  • Rebuilding customer trust and mindshare.
  • Creating new operating models.
  • Executing effective divestitures/mergers and acquisitions(M&A).

With deep, varied experience in the banking industry, we have developed a range of business solutions, outsourcing services and software that can help our clients succeed in these and other areas

 

 

 

You can find a list of financial institutions  and their addresses here http://www.bot.or.th/English/FinancialInstitutions/WebsiteFI/Pages/instList.aspx