Eight years of cheap money lead to risks

The loan-to-deposit ratio of the Thai banking industry surpassed the 100-per-cent threshold for the first time in eight years in May, indicating demand for loans was then higher than existing deposits.

The ratio reached 100.59 per cent in May, with outstanding loans of Bt7.08 trillion, higher than the Bt7.04 trillion in deposits. This ended an eight-year period of excess liquidity since the second quarter of 2000, when the loan-to-deposit ratio was 102.61 per cent.

The tightening liquidity has led to deposit interest-rate hikes among commercial banks, which want to attract money for loan extension and maintaining their customer bases. Many have introduced attractive packages to lure depositors, while the US and Europe are gripped by a credit crunch and the local industry prepares for next month's implementation of the Deposit Protection Act.

Bank of Thailand (BOT) senior director Amara Sriphayak said the country's interest rates had been abnormally low for a long time. Banks must raise their deposit rates to attract money for expanding their business.

"The liquidity in the system remains, but banks have raised their rates to adjust the balance in the economy," she said.

Spiralling inflation has brought not only a negative real deposit-interest rate, but also a negative real minimum-lending rate, which registered minus 1.62 per cent last month.

Full branches of foreign banks have tighter liquidity than do those of Thai banks. Their loan-to-deposit ratio is considerably higher than 100 per cent, but Thai banks' liquidity is also drying out.

The BOT said the loan-to-deposit ratio of Thai banks alone was 98.97 per cent in May, because their deposits, totalling Bt6.41 trillion, were slightly higher than their loans of Bt6.34 trillion. The ratio was only 85.67 per cent in May 2007.

The ratio has increased considerably since last year, when banks shifted their focus from retail business to wholesale customers to follow a strong demand for working capital.

Bank of Ayudhya president and CEO Tan Kong Khoon said his bank had no shortage of liquidity, although its loan-to-deposit ratio was 94 per cent and could reach 100 per cent in the future.

The bank's capital-adequacy ratio of 17.4 per cent of risk-weighted assets is high enough to serve loan expansion, while lending is likely to slow down in the second half of the year, he said.

The loan-to-deposit ratio of full branches of foreign banks was 117.01 per cent in May, with Bt737.7 billion in loans and Bt630.5 billion in deposits. The figure has been higher than 100 per cent since reaching 102.14 per cent in February.

Meanwhile, Fiscal Policy Office director-general Pannee Sathavarodom said the country's economy expanded at a decelerated pace in the second quarter.

Gross domestic product (GDP) rose 5.8 per cent year on year in the second quarter, lower than 6 per cent in the first quarter, she said.

High crude-oil prices and the world economic slowdown have adversely effected the economy.

Pannee predicts the risk of a spike in oil prices will remain in the second half of the year.

However, if the average price of crude oil in Dubai remains US$130 to $140 (Bt4,300 to Bt4,700) per barrel, GDP for the full year will be 5.5 per cent, she said.

Pannee said Finance Minister Surapong Suebwonglee had asked the Fiscal Policy Office to prepare to launch long-term measures, including an option to lower corporate income taxes, in order to boost the economy.

The minister also wants officials to look at the tourism sector, she said.