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| Banking
and Financial Sector |
Overview
 Commercial
banks have traditionally dominated the Thai financial system. However,
as Thailand’s economy expands and diversifies, so have its financial
markets, and increasingly other institutions are gaining a share
of the Thai financial sector.
There
are about 30 commercial banks in Thailand, 13 domestic and 21 operating
as foreign banks. In addition the Thai government controls four
banks, each serving a particular mandate: The Bank of Agriculture
and Agricultural Co-operatives, The Government Housing Bank, The
Government Saving Bank and The Export-Import Bank of Thailand. Commercial
banks are governed primarily by the Commercial Banking Act and supervised
by the Bank of Thailand, which prescribes the businesses in which
a bank can or cannot participate, and establishes the regulatory
controls to which commercial banks are subject.
Foreign
banks operating in Thailand may undertake the same basic types of
commercial banking activities as domestic banks. However, they are
prohibited from opening a branch network restricting them to a single
branch office and the operation of off-site ATM machines is prohibited.
The Bank of Thailand requires that foreign banks maintain capital
funds of 125 million baht (about US$ 3.5 million) invested in low
yielding government securities and generally limits their expatriate
management personnel to six.
The
banking sector was significantly liberalized in 1993 with the passage
of legislation under which banks can specifically engage in international
and investment banking activities by operating as International
Banking Facilities (IBF). Banks, both domestic and foreign, which
receive an IBF license may engage in offshore and domestic lending,
cross-currency exchange transactions, debt guarantees, letters of
credit matters, loan syndications, investment feasibility studies,
mergers and acquisitions advice, financial and economic data compilation
and underwriting abroad. IBF-licensed commercial banks must strictly
keep their commercial and international and investment banking operations
separate. 47 banks have received IBF licenses, 13 of them being
domestic banks and 34 foreign. Of the foreign banks operating as
an IBF, 19 have separate commercial banking operations while the
remaining 15 do not have branch operations.
 Thailand’s
domestic banks have endured tremendous suffering since the financial
crisis began in 1997. Non-performing loans (NPL’s) reached 46 percent
of outstanding credit, forcing banks to creatively raise new capital
to cover provisioning needs. Debt restructuring has been an on-going
process, with the NPL figures slowly reducing, and the number of
cases reaching bankruptcy court increasing. Many of the banks have
set up separate asset management companies to which the bad loans
are transferred. This removes the NPL’s from the banks' books and
should increase the efficiency with which the loans can be recovered.
As of the turn of the century, the large number of NPL’s have greatly
reduced new lending from the banks and pressured them to reduce
interest paid on saving accounts to as low as two and a half percent.
The
crisis has also seen the purchase of four domestic banks by foreign
institutions, with two more sales pending approval by the Bank of
Thailand. Many analysts believe their presence will unleash sweeping
competitive pressures on the banking industry in Thailand.
Finance
companies make up the other large part of the financial industry
in Thailand. They are governed by the Act of the Undertaking of
Finance Business passed in 1979. The act enables them to make loans,
although usually at higher interest rates and with shorter repayment
periods than bank loans. They procure funds by borrowing or accepting
deposits from the public, which are then used to finance commercial,
development, consumer and housing projects.
Thailand’s
finance companies have also been hard hit by the recent economic
crisis. 56 companies were deemed insolvent and closed in 1997, with
numerous forced mergers amongst the surviving companies. A governing
body was created to guide this sector through the crisis, the Financial
Sector Restructuring Authority (FRA), which was given sweeping powers
to restructure the sector. The closed finance companies had US$
22 billion in assets, which the FRA has been liquidating and distributing
to creditors. The FRA has come under considerable public scrutiny
in Thailand for the low recovery rates of the auctioned assets,
usually around 25 percent, and their openness towards foreign capital.
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