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17th Anniversary

Banks wiser but new challenges loom

The sound fundamentals of banks nowadays, with near-zero non-performing loans and bigger capital bases are in stark contrast to the situation 17 years ago.

Bankers believe a crisis like the one seen in 1997 is very unlikely, but they are faced with new challenges that could land them in a new kind of crisis.

The Tom Yam Kung crisis was a product of loose financial policies, following the massive inflows of capital in light of Bangkok International Banking Facilities. The cheap money fuelled the economy. Gross domestic product (GDP) expanded by 9.4 per cent a year on average from 1987-96, before contracting by 1.4 per cent in 1997.

Thanks to the fixed foreign exchange rate regime, banks were encouraged to borrow short term to finance long-term projects. Most of the funds were channelled into the property market, which was considered unproductive.

In 1997, the loans to deposits surged by 120 per cent from the previous year.

The problem started when foreign lenders pulled back money due to the current account deficits. The baht came under attack. Borrowers defaulted, pushing the banking industry's NPLs to an all-time high of 48 per cent of outstanding loans in 1997.

Recapitalisation was the norm then to make up losses, though the industry's average capital adequacy ratio was as high as 10.21 per cent as of January 1997.

The capital ratio is as high as 15.57 per cent as of May 2014, well above the 8.5-per-cent Basel benchmark. NPLs were at 2.2 per cent and loan to deposits at 90 per cent.

Kosit Panpiemras, executive chairman of Bangkok Bank, said last week that since the crisis, banks have placed more emphasis on strong capital bases and high loan loss provisions as they realise that only that could help them weather tough times.

From nil, now a stress test is conducted every year by the Bank of Thailand and macro-prudential policies are in place. One of them limits mortgage loans to 80-90 per cent of property value against 100 per cent in the past.

Thanyalak Vacharachaisurapol, head of money and banking at Kasikorn Research Centre, said the regular stress tests, in line with scenario simulations of the central bank, could help strengthen the industry's immunity. A strong capital base can help them withstand a sudden outflow of capital.

Looking ahead, there are new kinds of challenges.

Banks need to strengthen their competitiveness against regionalised and globalised banks operating in and out of Thailand. The business environment has changed, as local companies are penetrating overseas markets. Adjustment in lending policies is necessary, she said.

Kosit said national policies could also pose a challenge to banks. Due to populist policies launched in the past years, household debt has surpassed 80 per cent of GDP. While this boosted loans, it limits people's future ability to borrow. Falling domestic demand will in turn pressure the economy and hurt banks.

Loan growth should not exceed GDP growth, which, without populist policies could run 4 per cent per year. Excessive loan growth will only hurt banks.

Populist policies penalised the country's competitiveness, which could be strengthened only through human resources.

All banks need to improve human resources and IT systems, besides bolstering their capital bases and risk management.

"We cannot say a financial crisis will not reoccur in Thailand. Each individual bank has to prepare and immunise itself against internal and external factors," he added.


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