It remains uncertain whether commercial banks will need to raise fresh capital next year to comply with

the new international accounting standard (IAS 39), according to Bank of Thailand assistant governor Samart Buranawatanachok.

He said commercial banks' financial performance would be the factor determining whether they were in need of new capital. They will be able to set aside additional reserves, as required by the new standards, without recapitalisation if they earn high profits. On the other hand, if their profits are not good enough and their reserves at the time are lower than the new standards require, a capital increase will be necessary.

"They don't need to recapitalise this December, but we cannot conclude whether they will be in need of fresh capital in the next two rounds. It depends on their performance," he said.

The IAS 39 standard forces local commercial banks to raise their provisions for bad debts three times. The first round of provision hikes will be completed this month, followed by another round in June and the final one in December next year.

In the first round, commercial banks are required to set aside additional reserves equal to the gap between collateral and non-performing loans (NPLs) which are now before the courts.

In the second round, they are obliged to set aside additional reserves equal to the gap between collateral and NPLs that have missed payments for one year or more.

In the final round, the banks will have to set aside additional reserves equal to the gap between collateral and NPLs that are overdue for three months or more.

Samart said the banks will need relatively high reserves to comply with the third round, because the amount of three-month NPLs is high and existing reserves for this type of non-performing loan are generally lower than those for the other two types.

Under the new standards, banks will use a customer's cashflow as a benchmark in cases of loans without collateral. For loans

with collateral, either the collateral or the cashflow projection will be used as a benchmark, depending on which requires lower reserves.

According to current regulations, banks are required to set aside full provision only for doubtful loans and reserves must be allocated proportionately, according to a classification of loan levels.

Under the new standards, collateral will have a value of 62 per cent of appraisal, compared with 90 per cent under the current requirement.

Kasikornbank currently has loan-loss reserve coverage of 160 per cent, Land and Houses Retail Bank has 120 per cent, while Tisco Bank says it can meet the IAS 39 requirements this year.

In the case of specialised financial institutions, Samart said the central bank will apply the IAS 39 standards in checking their balance sheets. Whether they need to increase their capital will depend on the Finance Ministry.

Earlier, some specialised institutions, such as the Small and Medium-Sized Enterprise Bank, asked the central bank to relax its application of ISA 39 standards in their case, so that they did not face the need for a large increase in reserves.

Anoma Srisukkasem

The Nation