Interview : Predee Daochai and Piti Tantakasem
How resilient is Thailand’s banking sector compared to its neighbours two decades after the 1997-98 Asian financial crisis?
PREDEE DAOCHAI: The crisis provided many important lessons that ultimately brought changes to the financial institutions system in Thailand. Modifications were evident in many aspects of regulatory supervision and rules, as well as risk management of financial institutions, especially commercial banks.
Over the course of the past 20 years commercial banks have exhibited gradual improvements in their performance. Bank lending is cautious with effective risk supervision. Credit concentration in certain businesses, as was the case before the financial crisis, no longer exists. The loan-to-deposit ratio of domestically registered commercial banks now stands at 95.8%, compared to 115% pre-crisis. Loan quality issues have also been addressed, causing the non-performing loan (NPL) ratio to drop from more than 50% to 2.92%. Although Thailand’s commercial banks register a slightly higher NPL ratio than their regional peers, allowances for bad debt and doubtful accounts, as well as capital adequacy ratios are relatively high.
PITI TANTAKASEM: At that time, we talked about Thailand as the “new tiger” surpassing its neighbours; 20 years later, we are still not that close. So what happened, and what needs to be done? Thai banks used to be the second largest after Japanese banks in terms of asset size; today, Malaysian and Singaporean banks are bigger than Thai banks, and Chinese banks are global players. But why can’t our financial sector become a Treasury centre unit for the many industries operating in Thailand? If we can’t move beyond appealing only to local enterprises, it will be difficult to push the Thai banking sector to a new level.
The good thing is that we are stronger than we were 20 years ago. The bad thing is that our return on equity is declining; although we are strong we don’t know how to make good use of that equity to generate better income. If we look at Singapore or Malaysia, the net interest margin (NIM) is low, which is fine because the NPL ratio is also low. In this case, the risk-adjusted return is acceptable even if it is not as high as before. In Indonesia, for example, we see a country where the NPL ratio is higher, at around 3%, but their NIM is 6%, so arguably, they can justify it. But when we look at Thailand, their NIM is around 3% and declining, with an NPL ratio of around 3% – we are in a holding pattern. When we look at borrowing costs, banks in Malaysia and Singapore have an operating cost to total assets of around 1%. Indonesia, where there are coverage constraints, has a cost of 3%. For Thailand, the cost of total assets is around 2.3%, similar to the Philippines, which has similar coverage issues as Indonesia. We need to develop a new business model, or we will be stuck. However, this does not mean that the country’s banking sector is without opportunity.
Where do you see gaps in Thailand’s legal and regulatory framework that could potentially impede the development of financial technology (fintech) ?
PITI: Banks are hierarchical and bureaucratic, unlike tech start-ups, which tend to be lean and agile, allowing them to learn fast, fail fast and fail small. Banks are heavily regulated, so they tend to fail slow and fail big. This is very costly as they have to go through approval stages within the bank system, go to regulators and then spend a lot of money only to find out the customer has no interest in a particular product. This can be a real challenge.
Foreign banks and international players in Thailand can’t crack the next trend through the use of technology, and now the new trend is fintech. In the past, we would have opened the market so that banks operating in different markets could come and help the country develop that opportunity. However, I don’t think that we will be able to unlock future potential by inviting more banks to come to Thailand. Hopefully fintech and the start-up mentality will show banks a different way to tap into the industry’s potential.
PREDEE: Currently, Thailand’s financial regulators are working on a policy framework, drafting rules and regulations to create a healthy environment for Thailand’s financial sector to grow and to keep pace with the speed of new and emerging technologies. The process, however, may take time because these issues are new and need to be considered cautiously in order to boost the confidence of the general public and financial service’s customers while ensuring the overall stability of Thailand’s financial system.
By promulgating the Digital Asset Law on May 13, 2018, Thailand became the first country to create a specific law to govern digital assets. After this, the government is set to introduce regulations to supervise digital asset transactions and related activities to provide more clarity for operators, the business sector and investors. In addition, opportunities will be given to newcomers after their experimental phase in the Bank of Thailand (BOT) sandbox. Also in the pipeline is a license for a peer-to-peer lending platform, which should enable consumers to access and avail themselves of new financial service models.
In what ways can banks mitigate the risks from an increase in household debt?
PREDEE: Over the past several years Thailand’s domestically registered commercial banks have been aware of the possible risks that may be incurred from persistently high household debt. As a result, each bank has prioritised customer screening, especially certain groups of retail customers who tend to be more income-sensitive and who have varying levels of resilience to economic cycle fluctuations. The majority of household debt, namely home and auto loans, is categorised as secured, whereas the share of unsecured consumer loans is much smaller when compared to the overall outstanding household debt.
In addition, several Thai banks are having their systems developed to make use of big data for risk analysis and the assessment of customers’ debt-servicing ability to ensure greater accuracy in credit analysis and enhanced efficiency in credit risk management, allowing for the offering of customised products which are more responsive to both new and existing customers’ needs. Broadly speaking, the TBA is working with BOT and other agencies in the implementation of the Debt Clinic. This is a programme which aims to promote self-solutions among debtors based on their actual debt-servicing ability by equipping the general public with financial discipline through both financial literacy and debt-management skills. This will be instrumental in reducing the financial fragility of households and the economic system in Thailand.
PITI: Household debt remains a major issue that could hinder our overall growth. If Thailand remains stuck with high household debt, it will be difficult to achieve sustainable growth in consumer spending. In the past, the problem would have solved itself due to inflation. But Thailand is unique, with a household debt average of 80% of GDP – similar to developed countries. However, what is alarming is that the majority of developed countries also have a high percentage of mortgage loans, which is not the case for Thailand as it represents only one-third of household debt. The biggest debt comes from personal and car loans.
The good news is that household debt is coming down thanks to the BOT’s continuing initiatives. The Debt Clinic allowed all financial institutions to come together to work out the debt. Banks were appointed to work on behalf of peers so the debt could be restructured. Then the preventive measures based on income will help – the lower the income, the lower the gearing a customer can have. Lastly, we must continue to teach financial literacy, such as the TBA and BOT initiatives that show new graduates how to handle credit to prevent credit card dependency.
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