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Published on February 20, 2008

Excess liquidity is money that banks receive from depositors but have yet to lend to borrowers. The real sector covers most business activity outside of banking and finance.

The banking industry's loan-to-deposit ratio, including bills of exchange, is 86 per cent, indicating a large amount of liquidity in the system. This is a result of low credit growth, which has been caused by the sluggish economy.

Ruchukorn Siriyodnin, senior director of the Bank of Thailand's Financial Institutions Strategy Department, said the flood of liquidity along with an average capital-adequacy ratio of 15 per cent would help banks expand their lending. This will in turn nourish the real sector and enable it to conduct uninterrupted business.

At the end of last year, outstanding bank credit was recorded at Bt6.1 trillion, while deposits and bills of exchange were Bt7 trillion.

"The banks have enough capital and liquidity to expand businesses. They can boost their credit if there are positive factors to support such a move," Ruchukorn said.

The government's planned mega-project investment, however, brings about concern over a possible crowding-out effect, in which the government snatches liquidity from the private sector.

Ruchukorn said loan growth, particularly to the business sector, was satisfactory in the final quarter of last year, because of a recovery in both business and consumer confidence. Lending increased 4.6 per cent from the same period in 2006, compared with a 2.6-per-cent year-on-year hike in the third quarter.

Loans to the business sector rose 1.5 per cent in the fourth quarter, compared with a contraction of 0.9 per cent in the previous three months. Consumer lending, however, rose 16 per cent, close to the 15.9-per-cent increase in the third quarter.

According to the central bank, overall lending expanded 4.6 per cent last year, down from 5.9 per cent in 2006.

This was a result of a slowdown in loans for both consumers and the business sector.

Ruchukorn said banks had to show continuous improvement and enhanced efficiency, in order to make profits amid global fluctuations like the credit crunch that has affected the Kingdom's financial market and economy.

Banks had an overall operating profit of Bt158 billion last year, up from Bt156 billion in 2006. Net profit, however, was Bt25 billion, down from Bt65 billion, due to reserve provisioning to meet a new accounting standard.

Recapitalisation in the banking system last year amounted to Bt95 billion.

"Although banks faced fluctuations, which contributed to a drop in performance, they were able to manage their risks very well," she added.

Gross non-performing loans were 7.3 per cent in the fourth quarter, down from 7.9 per cent in the third. Net non-performing loans (NPLs) were 3.9 per cent, down from 4.4 per cent in the third quarter.

Ruchukorn declined to forecast how NPLs would fare this year, as the situation is dependent on the economy and the business sector's ability to repay its debts.

Anoma Srisukkasem

The Nation