Thailand

Author: | Published: 30 Sep 2004
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The Ministry of Finance (MoF) and the Bank of Thailand (BoT) have jointly prepared a financial sector masterplan for financial institutions to guide the development of the financial sector over the next five to 10 years, which was approved by the Cabinet on January 6 2004. An English version of the masterplan can be found in the BoT website.

The masterplan sets out the following strategies:

Measures to broaden general access to financial services:

  • promoting grassroots financial services;
  • transforming Bank of Agriculture and Agricultural Operatives (BAAC) into rural development banks; and
  • encouraging existing financial institutions to increase the level of financial services to low-income households.

Measures to increase efficiency of the financial sector:

  • Restructuring Thai financial institutions, by issuing only two types of licenses to financial institutions that accept deposits from the public:
  • Full-service commercial banks. One type will be allowed to open branches with no limit on number or location, but must merge with at least one other finance or credit foncier company. The other type will not be allowed to open branches.
  • Retail banks, which may offer financial services to retail customers and SMEs, subject to exposure limit per customer and other conditions set by the BoT.

Credit foncier companies and finance companies will be phased out, in favour of full-service banks and retail banks.

  • Restructuring foreign-owned financial institutions to enable them to play a greater role. There will be two types of foreign bank licences:
  • Subsidiaries of foreign banks, which will be allowed to open a certain number of branches.
  • Full branches of foreign bank.

Stand-alone Bangkok International Banking Facilities (BIBFs) will be encouraged to upgrade to full branches or subsidiaries. Tax benefits for out-in transactions will be discontinued.

  • One-presence policy. Currently, a financial group may comprise a number of financial institutions of different types. The new system of bank licensing will allow all functions to be performed by one financial institution.
  • Incentives for lending to retail customs and SMEs.

The masterplan lists a number of steps under "Streamlining rules and regulations".

To implement the masterplan, MoF issued notifications on January 30 2004 describing terms and conditions, and procedures for application of new commercial bank licences. Local and foreign financial institutions were invited to submit applications for new licences under the masterplan before July 31 2004. Twenty-seven applications were received, and the results will be announced by January 31 2005, according to a BoT spokesperson.

According to the BoT, at least 10 new banks will be established over the next two years, but the total number of financial institutions will fall as a result of mergers and downgrades. Effective September 1 2004, there was a merger between Thai Military Bank, DBS Thai Danu Bank and the Industrial Finance Corporation of Thailand, under the name Thai Military Bank Public Company Limited.

Background

In the aftermath of the 1997 Asian financial crisis, Thailand began an ongoing law and regulatory reform programme aimed to address outstanding issues confronting efforts to stabilize and improve the resulting crippled economy. These reforms focused specifically on reversing the depletion of net international reserves, correcting systemic problems plaguing the financial sector, counteracting a liquidity shortage that undermined the stability of the real estate sector and resulted in high levels of non-performing loans and curbing general regional economic turmoil. The recovery has largely been the result of fiscal stimulus and consumer spending, which has produced increasing government debt that, while large for the region, is still small in comparison internationally.

Governing laws

Commercial banks and finance companies are subject to two principal laws and numerous regulations and notifications:

  • Commercial Banking Act, BE 2505 (1962), last amended by Emergency Decree Amending the Commercial Banking Act (4), BE 2541 (1998); and
  • Act on the Operation of Finance, Securities and Credit Foncier Businesses (1979), last amended by Emergency Decree Amending the Act (5), BE 2541 (1998).

The BoT, in conjunction with the MoF, oversees the administration of these two Acts.

Two other important regulatory bodies are: the SEC, which was established under the Securities and Exchange Act, BE 2535 (1992) and has supervisory power over securities companies; and the Department of Insurance, which has supervisory power over insurance companies.

Draft Financial Institutions Business Bill

After the 1997 Baht devaluation, Thailand signed an assistance agreement with the IMF, which included banking sector reforms. When Thailand left the IMF Assistance Programme in June 2000, one of the remaining legislative reform initiatives was to enact a new financial institutions law. This law was in the final stages of enactment in August 2002. It would have unified the regulatory framework and strengthened the BoT's powers of supervision, monitoring and enforcement.

The bill defined financial institution business as commercial banking business, finance business and credit foncier business. The bill would have permitted current regulators to assign to the BoT supervision of specialized financial institutions, such as the Industrial Finance Corporation of Thailand and the Export-Import Bank of Thailand.

The bill retained the existing ceilings on foreign ownership (25%) and foreign directors (one-quarter), but allowed relaxation on a case-by-case basis.

The bill failed to clear Parliament in 2002 due to the Senate's insistence on including a cap of interest rate spreads over cost of funds. The bill will need to be adapted to the masterplan before it is resubmitted to the parliament.

Recent regulatory developments

Saddled with large numbers of non-performing loans, Thailand's banking sector struggled in the fall-out of the financial crisis. Debt restructuring was facilitated by a newly created Bankruptcy Court (1999), the introduction of reorganization provisions under the Bankruptcy Act and a contractual debt-restructuring scheme promoted by the Bank of Thailand. A substantial number of non-performing loans were transferred from commercial banks to asset management companies, and FIDF guaranteed deposits and liabilities of the remaining financial institutions.

The last new banking laws were enacted in 2002:

  • Act on Operation of Credit Information Business, BE 2545 (2002).
  • SMEs Development Bank of Thailand Act, BE 2545 (2002).
  • Islamic Bank of Thailand Act, BE 2545 (2002).

Pending new legislation includes a Deposit Insurance Bill (pending in the Fiscal Policy Office, MoF) and the Financial Institutions Business Bill.

Websites for information

The Bank of Thailand
The Business Reorganization Office
The Corporate Debt Restructuring Advisory Committee
The Department of Insurance
The Industrial Finance Corporation of Thailand
The Ministry of Finance
The Office of the Council of State
The Securities and Exchange Commission
The Stock Exchange of Thailand

Debt restructuring

As of May 2004, 378 requests for business re-organization had been filed, 316 requests had been approved and 230 re-organization plans had been approved.

A total of 16,966 corporate debtors were listed with CDRAC for the contractual debt restructuring process. As of April 30 2004, 13,595 corporate debtors were in the restructuring process.

  • 11,097 corporate debtors were successfully restructured;
  • 2,188 corporate debtors were unsuccessfully resolved;
  • 310 corporate debtors are in the negotiation process);
  • 89 corporate debtors are being contacted to participate in creditor-debtor meeting; and
  • 3,282 corporate debtors were declared bankrupt or transferred to Thai Assets Management Corporation (TAMC).

The tax incentive applicable to debt restructuring under Section 90 of the Bankruptcy Act and the BOT scheme initially were to expire on December 31 1999 but were extended until 31 December 2004 (Royal Decree 418).

Author biography

Albert T Chandler

Chandler & Thong-ek

Albert T Chandler graduated from the University of California with an honours degree in mining engineering in 1959 before completing his LLB at Harvard Law School in 1964. Since 1969, he has been a legal adviser in Bangkok and is a senior partner at Chandler & Thong-ek Law Offices Ltd, where he specializes in business law, mineral law, international transactions, project financing and investment projects. Chandler is also a lecturer at the Law Faculty of Chulalongkorn University in Bangkok.

Chandler & Thong-ek has a substantial project financing practice in Thailand, and received IFLR awards (project finance, and mergers and acquisitions) for best Thai law firm for 2000, 2001, 2002 and 2003.



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