A source close to the interim government said that according to a Bank of Thailand (BOT) investigation the SME Bank was considered to be in the worst position of all SFIs with regard to non-performing loans (NPLs).

"There are lots of problems at the SME Bank," the source said.

Many critics have blamed the populist policies of Thaksin Shinawatra's administration for creating huge bad loans that offset the balance sheets of many SFIs.

Since the BOT's recommendation to increase the capital of some ailing SFIs appears to have fallen on deaf ears, many were not surprised to hear Deputy Prime Minister and Finance Minister MR Pridiyathorn Devakula announce that in order to meet international standards SFIs must apply the same loan-loss provisions as commercial banks. The former governor also said he had been waiting for a long time to tackle the bad loans of these SFIs.

The BOT has no legal authority to force the state-owned SFIs to increase their capital. The source added that since the interim government had stated that it did not want to borrow foreign funds, financing would have to come from domestic sources.

"We need to have these SFIs increase capital. Domestic bonds need to be issued to finance them," he said.

How much funding is needed to finance the recapitalisation of the SFIs depends on the degree of their NPL deterioration.

Tarisa Wattanagase, deputy governor of the BOT, said earlier last week that bad loans at SFIs that had derived from the past government's policies showed a high percentage-to-lending ratio but were low in terms of actual amounts.

The SFIs affected by such loans include the SME Bank, the Government Savings Bank (GSB), the Bank for Agriculture and Agricultural Cooperatives (BAAC), the Government Housing Bank (GHB), the Islamic Bank, the Asset Management Corp, the Thai Asset Management Corp, the Export-Import Bank of Thailand (Exim), the Secondary Mortgage Corp (SMC) and the Small Industry Credit Guarantee Corp.

According to the Finance Ministry's data, as of June 30, 2006, overall NPLs of these SFIs amounted to Bt120 billion or 8.45 per cent of their total loans.

The SMC had the most NPLs, with bad loans accounting for 47 per cent of its business. The SME Bank was next with 28 per cent NPLs.

Exim's NPLs accounted for around 15 per cent of its loans, while the GHB, BAAC, and GSB were burdened by NPLs of 9.5 per cent, 8 per cent, and 3.96 per cent of their total loans respectively.

The SMC's high rate of NPLs mainly derives from corruption. Its situation has been probed by the Finance Ministry, which later sent information to the police for investigation.

The SME Bank's bad loans have been accumulating since it was the Small Industry Finance Corporation and offered loans to small businesses using sub-standard credit-issuing practices. Its name was changed to the SME Bank during Thaksin's administration when the institution was used by the government to provide funding to entrepreneurs.

Some critics believe that, given politicians' involvement in its operations, the SME Bank's assets could be in an even worse state than is known.

Prominent economist Ammar Siamwalla last week warned that the government should reduce state intervention in banks. He said there should be laws specifying the boundaries of the government's relationship with financial institutions.

While the amount of capital increase has yet to be calculated, debt-restructuring as well as credit risk management still need to be addressed, he said.

"The BAAC is financially okay so far. Now the GHB has tried to collect some debt repayments from farmers under the debt-suspension programme, but if the government is to apply a flat standard [of provisioning] to the BAAC, it needs to consider it carefully," the source said.

Earlier, Tarisa said that in agreement with the Bank of Thailand the BAAC had adopted new criteria for measuring NPLs. This was necessary because the cash flow of BAAC borrowers was quite different to that of other businesses, he said. Tarisa described the BAAC's new NPL measuring standards as weaker.

Last week Pridiyathorn said he would ask executives of the GSB to review the "people's-bank" project initiated by the Thaksin administration, which has been criticised as another easy-credit policy.

The source said the people's-bank scheme might not be suitable for the GSB.

"By its nature, I don't think the GSB has that capability to lend: it's a savings bank, not a lender," he said.

Jiwamol Kanoksilp,

Anoma Srisukkasem

The Nation