February 13, 2013 00:00 By Wichit Chaitrong
Reckless lending by ex-execs blamed for pile of bad debt
The explosion of bad debt at the state-owned Islamic Bank of Thailand was largely caused by grossly negligent lending by former executives, according to its new president.
Meanwhile, former finance minister Chalongphob Sussangkarn has suggested that the Finance Ministry overhaul the oversight of state banks to improve governance and prudent lending practices.
Non-performing loans (NPLs) at IBank currently amount to Bt39 billion, or about 30 per cent of outstanding loans, its president Thanin Angsurarangsit said yesterday.
He said former executives did not adequately play attention to cash flow, collateral value and monitoring.
“Loans were made without taking into account whether the business of borrowers could generate enough cash flow to repay the debt,” said the newly appointed bank president.
Moreover, the value of collateral placed by debtors was inflated, in some cases 80 per cent higher than market prices.
Former executives did not monitor their lending by reviewing how the projects they had financed were progressing, if at all.
“There were also some irregular lending practices such as giving loans to nominees of the borrowers.”
The Finance Ministry is investigating possible corruption at IBank.
About 80 per cent of bad debts came from corporate clients, particularly those in construction business and real estate, Thanin said. The number of bad loans shot up last year after the sharp expansion of lending in 2009 and 2010, which jumped from between Bt20 billion and Bt30 billion to Bt100 billion, he said.
“The official NPL figure is Bt24 billion, or about 20 per cent of outstanding loans, but when we impose the benchmark of the Bank of Thailand, bad loans are worth Bt39 billion,” Thanin said.
IBank has asked the Finance Ministry to inject fresh funds worth Bt13 billion.
The bank will try to maintain its lending at Bt120 billion this year. New lending to large corporates will be reduced as the bank focuses on retail clients who are Muslims.
The bank will freeze new hiring except for middle managers, filling as many as 20 posts, he said. New branches will be opened only in densely Muslim-populated areas.
Meanwhile Chalongphob suggested that the Finance Ministry had to overhaul the oversight of state-run banks. The country’s specialised financial institutions (SFIs) have grown rapidly but oversight has not improved, leading to a high rate of NPLs at IBank and the Small and Medium Enterprise Development Bank of Thailand, he said.
Moreover, the ministry may have to think about fair competition between commercial banks and SFIs if all play in the same market. Originally, the state-run banks were created to provide financial services to poor Thais who could not access commercial banks’ loans. Now the SFIs have started to compete with commercial banks.
“They should play under the same rules,” Chalongphob said.
The central bank currently supervises commercial banks with strict regulations, while the Finance Ministry oversees the SFIs with lax regulations, he said. The SFIs do not pay corporate income tax, but they transfer part of their profit to ministry. They need not pay 0.4 per cent of their deposit base to the Deposit Protection Agency.
Advice from the International Monetary Fund and the World Bank to limit the role of the state banks should be seriously considered by the government, Chalongphob added.