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Published on April 2, 2008

In Thailand, critics blamed former prime minister Thaksin Shinawatra's easy credit policy for causing high debt as well as fraud in state-owned banks or so-called specialised financial institutions (SFIs).

Supporters of the disbanded Thai Rak Thai Party claimed the easy credit policy was a "policy innovation".

Now the coalition government led by the People Power Party has reassumed the same policy. The Cabinet yesterday approved the Finance Ministry's proposal of cheap loans for low income groups and a debt moratorium for farmers.

The Government Savings Bank (GSB) will set aside Bt5 billion this year to lend under the People's Bank scheme initiated by Thaksin in 2001. After seven years of this micro credit scheme, GSB has lent Bt38 billion to low income groups. The outstanding loans were Bt6.8 billion at the end of last year while bad debt or non-performing loans (NPLs) were Bt1.2 billion.

Deputy Prime Minister and Finance Minister Surapong Suebwonglee and GSB's bank executives argued that the NPLs were low compared with total lending.

But NPLs were actually high when compared with outstanding loans worth Bt6.8 billion - almost 18 per cent. This suggests that micro-credit schemes run by state banks are not efficient when compared with successful micro-credit schemes initiated by local communities in various provinces.

"When it comes to micro-credit lending, the government should not be involved and should let the communities run their own business," outspoken economist Ammar Siamwalla once said.

Chob Yodkaew, a highly praised community leader in Songkhla, has demonstrated that micro-credit and community welfare can be managed efficiently by villagers and with their own savings.

The resumption of the debt moratorium by the current government indicated that the first debt moratorium for three years did not work as former prime minister Thaksin claimed.

The Bank for Agriculture and Agricultural Cooperatives (BAAC) again has been forced by the government to implement this policy. Critics questioned why the policy is needed when prices of key farm products have risen sharply. Debt relief for the poor in some cases can be justified. But can we trust politicians whose priority is boosting their own popularity?

The other serious issue is the financial position of the Small and Medium Enterprise Development Bank of Thailand (SME Bank). Its bad debts are currently close to 50 per cent of outstanding debts. The Bank of Thailand audited the bank recently and found 25 new cases of suspected fraud involved in lending. This follows previous fraud cases reported earlier that led to legal action against former executives of the bank.

Fraud had also been uncovered at the Secondary Mortgage Corp (SMC).

The government has not learned from previous policy mistakes of easy credit, or the experience of other countries. Just look at what is happening in the US now. The finance minister is still directing SFIs to lend more, claiming this will boost the economy. Actually, the government is making a false claim. The lesson from the US and our own lessons have suggested that throwing money at problems may boost the economy in the short run but lead to serious trouble or even a crisis later. Government banks will not be allowed to collapse but taxpayers cannot avoid footing the bills.

Looking back, Thaksin's cash handouts can be viewed as a political tool, aimed at diverting voters' attention away from other dubious policies and projects designed to serve the interests of politicians in power. Critics now interpret adoption of the same policy as a means to cover up the mess.

Wichit Chaitrong

The Nation