Kittiratt fails to oversee banking sector

While minister lectures BOT, crisis of confidence is growing at state banks

Over the past week, crowds of people rushed to withdraw their money from the troubled Islamic Bank of Thailand (IBank) after it was found that this state-run bank had accumulated high levels of non-performing loans. The financial problems at IBank came on the heels of revelations of bad assets at the Small and Medium Enterprise Development Bank (SME Bank). The Fiscal Policy Office (FPO) has asked the two banks to clear their debts before it decides whether to inject money to help them.

Fortunately, the banks should be able to contain their problems at this point. The operation at IBank is small compared to those of other commercial banks. Nonetheless, the situations at these two banks should serve as a reminder for decision-makers to adopt a prudent approach in the operation of state-run banks.

These specialised state-run banks were established to serve niche demands. SME Bank is aimed at promoting entrepreneurial activity among Thai small and medium-sized business operators, while IBank caters to Muslim customers, operating on Shariah principles.

However, attempts to use these banks to serve political purposes have seen them apply lax loan-approval policies compared to commercial banks. Some loans were approved to serve the government's purposes, and some loans were given to people with political connections. It is no secret that the Yingluck government aims to promote domestic consumption to stimulate economic growth. Easy loan approvals would help support its populist policies.

As of December 31, non-performing loans (NPLs) at IBank were worth Bt24 billion, or 20 per cent of the loan portfolio. The high amount of bad debts prompted the FPO and the State Enterprise Policy Office to work with IBank to structure the debt before the problem gets bad enough to affect confidence at other state-run banks. As of the end of last year, IBank had assets of Bt130.83 billion and liabilities of Bt126.50 billion. Outstanding loans were Bt109.49 billion, of which Bt24.73 billion, or 22 per cent of the portfolio, were NPLs.

Thai commercial banks have so far been successful in running banking businesses by applying cautious and prudent policies, after most of them were hard hit by the financial crisis. Rules and regulations have been strengthened to ensure there will be no repetition of the crisis in 1997, which erupted because of the lack of public confidence in the Thai financial system. That crisis started off with the disclosure of NPLs at some small banks, which caused a loss of public confidence in financial institutions. Eventually, people panicked and rushed to withdraw their money, leading to the haemorrhaging of the entire financial system.

But while commercial banks have learned the lesson, the state-run banks have not. The Finance Ministry should have done a better job of overseeing these specialised banks, which are under its purview.

But over the past few weeks, Deputy Prime Minister and Finance Minister Kittiratt Na-Ranong has instead concentrated on the interest rate decision at the Bank of Thailand and seemingly forgot to look at the operations under his direct supervision. Someone with knowledge and understanding of the issue must be put in charge now in order to prevent public panic.

Kittiratt should have acted to assure the public that the Finance Ministry has a good plan to deal with the financial woes at these two state-run banks, instead of letting Prime Minister Yingluck Shinawatra make confusing statements about the government's role in guaranteeing deposits at the banks.

At this point, the situation at the two state-run banks is unlikely to hurt the entire system. However, if the authorities fail to apply a credible system of oversight, the crisis of confidence could spill over to other state-run banks. Effective action is required before it is too late.