As everyone knows, Thailand helped bring Asia's financial house down seven years ago when the baht tanked. Worst hit by the resulting chain of devaluations was Thailand's own financial sector. Billions of dollars were lost as dozens of finance companies went belly-up. The banks, which had recklessly extended credit in the boom years, ended up with nonperforming loan rates as high as 48%.
Thailand's financial sector has since recovered, but much-needed structural changes were never made. Now Prime Minister Thaksin Shinawatra's government has a master plan to consolidate the surviving institutions in a bid to shore up the industry. The reforms, passed by Parliament in December, call for the elimination of finance companies by requiring that they apply to become full-fledged banks. To qualify, they must have larger capitalization and meet stricter risk-control criteria, creating the incentive for them to either merge or be acquired by existing banks. "We want a financial sector that is strong, competitive, and efficient," says Tarisa Watanagase, deputy governor of the Bank of Thailand. "There are too many institutions."
The changes, which will start to take effect early next year, will make it easier for the central bank to supervise the banking system, since it will have fewer and bigger financial-services companies. But by far the most important reform will allow private banks to enter the red-hot "hire purchase" market for the first time. That involves auto finance and installment payment plans for household durable goods, a service now provided solely via finance companies. In the past two years the segment has seen 40% annual growth. In late February, Kasikornbank, the country's third-largest lender, announced its intention to do a share issue to raise money to buy a finance company. "We think it has great potential," says David Hendrix, executive vice-president for retail banking at Kasikornbank.
Why all the effort to shake up the system now? The country has come a long way since the dark days of the crisis. Government officials say consolidation will help build stronger balance sheets now that the sector is healthier. By the end of last year, aggregate nonperforming loans had fallen to just 12.7% of portfolios. And debt-shy companies are borrowing again, thanks to Thailand's robust 7% economic growth. Last year bank loans grew 5%, the first increase since 1998. "It took six years to get to a point where companies have the balance sheets to borrow and banks have the balance sheets to lend," says Therapong Vachirapong, an analyst at Merrill Lynch Phatra Securities Co.
SHOTGUN WEDDINGS. The first Finance Ministry-mandated merger will be of two institutions it controls, Industrial Finance Corp. of Thailand and Thai Military Bank, with Singapore-owned DBS Thai Danu Bank. The deal is expected to be completed by June, reducing the number of commercial banks from 13 to 12. Analysts are waiting to see if these mandated deals will deliver the promised payoff. Standard & Poor's noted in a recent report that "it is too early to assess the potential effects of the industry consolidation" on the quality of bank assets. Indeed, financial companies have underperformed the Stock Exchange of Thailand Index this year. "There's a lot of uncertainty about how things will turn out," says Andrew Stotz, an analyst with ING in Bangkok.
Still, even critics acknowledge the reforms could eventually strengthen the banking system. Annemarie Durbin, chief executive officer of Standard Chartered Nakornthon Bank, welcomes the master plan. "They are taking the right steps, [but] it's not an easy journey," she says. Seven years later, few doubt that it's a journey worth taking.
By Frederik Balfour in Bangkok