Commercial banks' credit approval standards have improved significantly, which will help bring non-performing loans down to the targeted level of 2 per cent by the middle of next year, the Bank of Thailand said yesterday.

MR Pridiyathorn Devakula, the central bank governor, said a BOT study had found that commercial banks had made significant progress on credit-approval efficiency compared with previous years. Their risk-management systems are now also much improved, he said, adding, "Their procedures have been developed substantially, although not completely."

Thai banks suffered from high non-performing loans (NPLs) in the wake of the 1997 financial crisis, with bad loans peaking at 48 per cent in mid-1998. However, NPLs have declined gradually since then.

Banks are examined by the central bank once every one or two years, depending on their efficiency and performance. The BOT has encouraged them to take risk management into account in a bid to enhance the banking system's standards in accordance with international requirements, particularly those of the Bank for International Settlements (BIS).

As a result, commercial banks have invested in systems, human resources and improved risk management in a bid to meet the BIS's requirements before 2008 - the so-called Basel II standard.

Before the 1997 financial crisis, Thai banks had been too optimistic about the economy. Many did not strictly conduct feasibility studies or analyse their borrowers' ability to service debts. Some provided loans to related parties - so-called "crony lending". This all resulted in enormous bad debts and ultimately a major burden on taxpayers.

Pridiyathorn believes NPLs will decline to about 2 per cent of overall lending by the middle of next year when banks sell out their non-performing assets (NPAs) to asset-management companies, including Bangkok Commercial Asset Management (BAM).

BAM president Banyong Visatemongkolchai said this week that the company would receive Bt62 billion of NPAs from commercial banks this year. It currently holds Bt38 billion of assets in its portfolio.

Commercial banks and asset-management companies, however, do not officially finalise selling prices for NPAs. An NPA pricing model is expected to be announced soon.

The BOT governor said selling prices should be agreed by both sides in a bid to encourage bidders and sellers to take part. He said there were no further incentives available to speed up such deals.

Pridiyathorn added that NPLs had continued to decline despite the current economic slowdown, and that they were likely to fall rapidly around the end of the year.

"I was very worried when the NPLs were stagnant at around 10 per cent, but I feel more relieved now," he said.

As of April, the banking system's NPLs were recorded at Bt471 billion, or 8.04 per cent of total loans. NPAs came in at Bt180 billion.

Anoma Srisukkasem

The Nation