Kasikornbank President and CEO Banthoon Lamsam sees credit extension and the payment system as the greatest risks facing Thai banks.
In an interview, he noted that fierce competition in the lending market was forcing commercial banks to use all available strategies to clinch deals, at any cost. As one bank is prepared to offer an attractive deal to a client, another bank is unable to back off and instead offers an even sweeter deal. As the lessons from the global crisis show, this policy is pushing all to the brink of collapse.
"All banks are boasting that their risk management system is great and that would prevent such a collapse," he said. To safeguard financial prudence, he suggested raising the height of the Chinese wall, so that risk management is not compromised.
He asserted that Thai banks were lucky to be spared the global financial crisis, thanks to the low investment in complex derivative products following the painful experiences of the 1997 crisis. Otherwise, in the case of compromised risk management, this could have hurt many banks.
Regarding the payment system risk, Kbank learned a painful lesson recently. In mid-June, the bank launched a new cheque-clearing software only to find that the entire system was shut down. A large number of cheques piled up, and it took the bank five days to fix the problem. This happened even after a number of tests.
"Information technology is a big risk. Aside from the huge cost involved, it could jeopardise operations. Before, we ran on a manual system. Now, with the electronic linkage, when one falls, others follow. It remains unclear if the Bank of Thailand is up to capacity to monitor the smooth operations," Banthoon said.
He suggested that all new systems should be thoroughly tested, to prevent such mishaps.
To him, these two factors should be of greater concern than the economic and political risks. With strong exports and recovery in domestic spending and investment, the economic risk is of no concern to him. Meanwhile, political risks tend to be a short-term problem while the long-term impacts would be experienced years after this when Thailand's competitiveness is sliding.
He noted that with the political turbulence, Thailand has shown lack of progress in infrastructure investment, chiefly education and transportation networks. Without better infrastructure, Thailand would see little economic progress and as shown by the competitiveness ranking, other nations are surpassing the Kingdom at the global level.
Banthoon said the financial authorities' attempts to further narrow interest spreads will only increase the burden on commercial banks. He said though it was the national policy, the government should beware that too much pressure could mean intervention in the market mechanism.
At the end of June, banks' net interest margin stood near 3 percentage points on average. The authorities have high hopes that with increasing loan growth, which will boost their interest income, banks would be willing to reduce the NIM.
Given the strong industry loan growth of 3.6 per cent this year until June, DBS Vickers Securities (Thailand) expects the momentum to continue in the second half due to seasonally stronger demand from small and medium-sized enterprises. It raised the loan-growth forecast to 7.1 per cent from 6 per cent in 2010, and to 6.2 per cent from 5.5 per cent in 2011. On average, Thai banks are expected to see 17 basis points wider NIM this year.
According to Tisco Securities, KBank and Siam Commercial Bank are believed to see the biggest NIM expansion during the interest rate upcycle due to the highest chunks of fixed deposits in their custody.