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If backed, new collateral law on loans could be boon for SMEs, seminar hears

A pending secured-transaction law could become another tool to help businesses - especially small and medium-sized enterprises - get easier loan access, but it would need the support of all relevant parties for that to happen, a seminar was told.

Bank of Thailand Governor Prasarn Trairatvorakul said the law, which is in the draft stage, could benefit the country's social and economic development as it could be another mechanism to help all businesses get access to loans.

He made the remark at the seminar this week that looked at how the secured transaction law could help strengthen the economy. It was co-hosted by the secretariat of the Senate and a committee tasked by the Law Reform Commission of Thailand with revising the law.

Prasarn said SMEs had contributed a great deal to the economy and were key supply chains for major industries.

There are between 2.7 million and 2.9 million SMEs in Thailand but it is estimated that only about 700,000 to 900,000 can easily access a bank loan.

The law, which has been developed since 1998, aims to provide a new avenue for businesses to secure loans besides the existing pledging and mortgage system. It will allow them to secure credit with more collateral asset-class choices and without the requirement of having to deliver an asset to a creditor.

This will make it easier for SMEs to access a loan to start or expand an operation, as they can still use the mortgaged or pledged property to conduct their business.

Under the Civil and Commercial Code, movable property can be used as collateral in exchange for loans but the borrower is required to deliver possession of the asset to the creditor. As a result, the borrower cannot utilise the asset. This could result in a business owner not being able to use his own machinery, for example.

While immovable property can be mortgaged in exchange for credit and without delivering an asset, such mortgages are limited to real estate and other specific assets.

But under the new secured-transaction law, assets that can be used to secure loans range from movable property that borrowers utilise in doing business, such as machinery, raw materials and inventory goods, and intellectual property. The borrower and the creditor need to agree on what is used as collateral.

The Asean countries that have adopted this kind of law are Singapore, Malaysia, Cambodia, Indonesia and Vietnam.

Penthip Pornchaded, president of the Association for the Promotion of Thai Small and Medium-Sized Enterprise, said businesses had been waiting for such a law to take effect. But she added that SMEs must come up with clear business plans to convince creditors that they will be repaid.

Boontuck Wungcharoen, chairman of the Thai Bankers' Association, agreed the law would result in more SMEs getting credit, which would help increase the country's competitiveness.

Former Senate deputy speaker Surachai Liangboonlertchai also believes the law could strengthen the economy. However, he said the law alone might not be adequate to ensure easier loan access if financial institutes do not fully support SMEs.

He added that even if this law is adopted, SMEs might not be able to get easier credit access if financial institutes strictly adhered to the philosophy that they primarily have to safeguard profits and avoid financial losses as much as possible. If a financial institute found that an SME loan applicant had a low chance of being successful, the loan might not be approved.

Surachai also pointed to Article 22 of the draft law, which would allow borrowers to continue using pledged assets unless otherwise agreed by the contractual parties. He is concerned that if the term "unless otherwise agreed" is exploited by contradicting the objectives of the law or by putting borrowers at a disadvantage, the law might fail to become an effective tool for SMEs.

Kumchai Jongjakapun, who chairs the Law Reform Commission of Thailand's committee revising the law, believes all relevant parties will benefit from the change and the commission will make sure it is fair to all parties.


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