The foreign borrowings have to be fully hedged to qualify for the exemption from the 30-per-cent reserve requirement.

Commercial banks are now telling their corporate customers to borrow from local financial institutions rather than incur the extra cost of hedging fees.

Tak Bunnag, executive vice president of Bank of Ayudhya, said last week that his bank was advising its multinational corporate customers to borrow here instead of offshore.

The foreign-exchange hedging requirement could make short-term foreign borrowing more expensive for corporations, he said.

"But we don't think the requirement will increase customers' funding costs that much," he said.

Most customers who borrow long-term foreign loans usually fully hedge them anyway to cover currency risks, he added.

Foreign capital brought into the country for less than one year is subject to 30-per-cent withholding with no compensation.

Bank of Ayudhya also suggests customers borrow domestically because there is no guarantee that the central bank will not take further steps to rein in baht appreciation.

Moreover, it is generally a good idea to diversify sources of funding to reduce foreign-exchange risks.

Songpol Chevapanyaroj, Kasi-kornbank's capital market business head, said his bank also advised customers to broaden their funding sources. The cost of funds will vary according to the country that extends the loan.

"Now, they must look not only at the loan rate or cost of funds, but also the liquidity [of the funding source]. They also need to think which source of funds is best for the current situation," he said.

Pakorn Peetathawatchai, executive vice president of Siam Commer-cial Bank, said last week his bank also counselled its customers to tap the onshore market.

He said the fully hedged rule should not be applied to all types of businesses. For example, those with both income and expenses in US dollars - say PTT Exploration and Pro-duction - should not be included.

Naris Cheyklin, chief financial officer of Central Pattana, said the hedging rule would cost companies with foreign incomes about one per cent of their total borrowings per year for the higher operating costs and hedging fees.

Virapan Pulges, managing director of Ticon Industrial Connection, said companies would be expected to face higher hedging costs. But they should weigh whether borrowing from domestic banks or borrowing from abroad even with the extra hedging cost would be worthwhile.

Suchada Kirakul, assistant governor of the Bank of Thailand, said commercial banks were in good shape liquidity-wise to meet rising loan demand, as corporations are expected to shift to local borrowing due to its withholding measure.

Since the loan-to-deposit ratio of banks is still low, they have ample room for lending, she said. The ratio stood at 86.85 per cent as of November.

Last week, Bank of Thailand Governor Tarisa Watanagase announced that short-term foreign borrowings of companies in Thailand would be exempted from the reserve requirement, if they fully hedge their loans with forex swaps.

All types of borrowings are eligible for the exemption except those for investment in commercial paper, she said.

Debtors have to produce loan contracts indicating the objective of the borrowing in order to get the exemption.

Anoma Srisukkasem,

Somruedi Banchongduang

The Nation