They also have an important role to play in the determination of policy with regard to supervising and directing the distribution of credit appropriately to different economic sectors and situations.

My recommended guidelines for development and regulation of non-bank financial institutions (NBFIs) are as follows:

Personal loan

In order to reduce black-market borrowing, which often

comes with high interest rates and the possibility of aggressive behaviour when demanding debt repayments, there should be regulations protecting consumers and creating fairness for operators/service providers as well as allowing low-income earners to obtain credit from the financial system.

This can be achieved by establishing clear guidelines for credit ratings of personal loan customers, thereby reducing the risk of non-performing loans (NPLs).

Likewise, by setting an interest rate ceiling, many NBFIs will be forced to reduce credit to low-income earners; the knock-on effect being that consumers may be forced to once again borrow money from the underground market.

Interest rates should be determined according to the risk involved or the amount of the loan.

In the long term, financial discipline should be practised by using the Central Credit Bureau as an important tool to collect data on debt performance and other important behaviour in order that service providers can appropriately estimate the cost of risk for each customer.

Personal loan providers should also have transparency and disclose all pertinent information to consumers regarding real interest rates, accumulated interest and customer charges.

Strong and clear regulations should be drawn up to clarify the extent of punishment if entrepreneurs take advantage of their customers.

Credit card

In order to decrease the necessity of using cash and to reduce costs in the payment system, promotion of credit card businesses should be encouraged, but not promotion of credit cards to borrow money excessively.

However, without proper controls credit card loans may affect household debt and NPL levels.

To deal with this potential problem, full and effective use of the Credit Bureau needs to be achieved. Accurate, up-to-date and easily accessible credit information will help financial institutions decrease the risk of loans becoming NPLs and will thereby increase the quality of credit.

When credit information is fully available, it will promote the accurate credit rating of consumers by financial institutions. This will then allow borrowers with a good repayment history to benefit from lower costs and interest rates than those with a poor rating or record of default.

Leasing

Leasing is largely unknown and there are no specific laws pertaining to leasing companies. Therefore, they base their business on related laws, some of which directly conflict with each other.

Moreover, standards of regulation of entrepreneurs in each type of leasing group are as yet non-uniform.

Besides, Thailand still lacks a secondary market for leasing property, particularly in the field of machinery and manufacturing equipment.

Therefore, to develop and regulate this type of business, special financial institutions should be established to promote leasing companies, help the public sector to develop leasing businesses in general, help create clear enterprise devel-opment standards, provide consultation, and develop a secondary market for machinery and manufacturing equipment.

They should also help conduct surveys and match supply and demand in all related sectors, including leasing companies, those who wish to use the property, and the owners of the property.

Specific laws for leasing companies should be considered in order to standardise minimum qualification requirements, regulate the establishment and operation of leasing companies as well as to promote the leasing business by providing clear guidelines for taxation and accounting, and reducing the difficulties of defining related laws.

Public awareness campaigns should also be aimed at potential entrepreneurs, especially small and medium-sized enterprises, in order to disseminate the advantages of leasing as a source of capital and to help promote the industrial development of the country.

Chodechai Suwanaporn

Special to The Nation

This is the second in a three-part series by Chodechai Suwanaporn of the Finance Ministry on non-bank financial business regulation, based on his book. The writer can be reached at chodechai@fpo.go.th.