Long recovery road for banks

It was in the early morning of July 2, 1997, when all presidents and CEOs of Thai commercial banks were unwillingly woken up by the central bank announcing that the country's foreign-exchange regime was being changed from being pegged to the dollar to a managed-float system.

Thus their years-long nightmare began.

With the floatation regime, the baht shot up to its weakest point of 56.7 to the US dollar in February 1998, compared with 25 to the dollar before the crisis. Most bank customers were brought to their knees, with foreign debts doubled almost overnight.

Several banks saw an unstoppable run on their deposits.

The government was forced to close down many finance and securities firms, reducing their number from 62 to 23.

Some months later, the bad loans of financial institutions climbed to a peak of 46.7 per cent, a level that would render any finance company in the world unviable. If measured by current stricter standards implemented by the Bank of Thailand, bad loans at that time would have reached 60-70 per cent.

Bank lending ground to a halt as the financial market faced systematic failure.

Former finance minister Tarrin Nimmanahaeminda recently said his greatest fear about banks in the wake of 1997 financial crisis was about trade financing.

"As the international community lost trust in Thai banks amid the financial crisis, what I quietly feared most was that Thai banks would follow the situation in Indonesia, where its banks were cut off from credit lines due to a lack of confidence," he said.

"Banks in Indonesia couldn't issue letters of credit. Small and medium banks in Thailand at that time had already suffered cut credit lines and couldn't issue letters of credit. And the large banks were the next target. I couldn't let it happen as trading is a very big issue."

After the crisis, the government tried to solve the problem of the entire financial system by leading financial institutions into debt-restructuring while banks were struggling to address the most urgent issue: capital increase.

The next two years, 1998 and 1999, were a time of huge recapitalisation for most banks and the remaining finance companies. In the first quarter of 1998, when the window of opportunity had hardly opened, only Bangkok Bank and Kasikornbank (then Thai Farmers Bank) managed to issue capital-increase shares via global offering, fetching Bt43 billion and Bt33 billion, respectively. Then in early 1999, several banks had to increase capital again by issuing high-cost hybrid securities that could be counted as tier-1 capital.

The central bank intervened one by one in several banks that failed to seek new capital, starting from the now-defunct Bangkok Metropolitan Bank to Siam City Bank, First Bangkok City Bank, Nakornthon Bank, Union Bank of Bangkok and Laem Thong Bank. Some were merged into other state-owned banks, while others were bought by foreign banks. The intervention helped to stop their deposit runs.

The years 1999 and 2000 saw the banks seriously start their debt-restructuring process by allocating significant resources to manage their own bad loans. It was during this period that Thai bankers really learned about debt-restructuring, while negotiations with customers had a lot to do with the success of curbing bad loans. Many strategies were brought on the table, including haircuts, debt-maturity extensions, debt-to-equity swaps and foreclosing assets.

The credit system had been much damaged as "strategic non-performing loans [NPLs]" occurred in almost every bank. Banks were in a difficult situation of trying to convince good borrowers to continue to service debts, while many corporate customers pretended they were broke despite the personal wealth of their major shareholders.

Amid massive debt-restructuring, banks also stole good customers from each other. Krung Thai Bank was the most aggressive lender, offering highly competitive lending rates, while other major banks were still cautious about lending.

While their books turned red from lack of new income and losses from debt-restructuring, most banks announced voluntary early-retirement programmes, reducing the number of staff significantly over five years.

Along with debt-restructuring, surviving financial institutions changed their credit culture forever, shifting from a "no land, no loan" policy to loans based on cash flow and business potential. Risk management and corporate governance were addressed in all departments, from the top to the bottom levels of management.

In 2004, Kasikornbank led the banking industry by introducing a re-engineering scheme aimed at boosting customer service. Most banks then followed suit. The move was spurred by the need to boost efficiency after foreign banks bought into smaller banks and became competitive rivals to Thai banks. Some Thai banks also hired foreign advisers to help them restructure operations for greater efficiency.

Over the past two years, banks have seen their bad loans in percentage terms to total loans falling to single digits - a level they are quite comfortable with. As of this year's first quarter, Thai banks' NPL level had fallen to 4.57 per cent of total loans.

So they have shifted their focus to other things, especially competitiveness.

A huge amount of investment has been put into information-technology development annually, while most banks saw a need to change their image and train their staff to become more service-minded. Consumer-finance products have become more diversified and customised than ever before. Banks are busily preparing themselves for financial liberalisation, which is likely to occur in the next few years.

Their competitors also include new smaller banks that have been upgraded from finance companies under the central bank's financial master plan implemented two years ago. Tisco Finance was upgraded to Tisco Bank, Kiatnakin Finance to Kiatnakin Bank, AIG Finance to AIG Retail Bank, and Asia Credit to ACL Bank.

The master plan has changed the banking landscape, preparing banks for greater competition and volatility in the future.

With past developments, Thai bankers seem to have learned their lesson well. However, a new crisis for them has just begun. This time, it will be a crisis of losing their customer base to competitors.

Jiwamol Kanoksilp

The Nation