The government and the Bank of Thailand (BOT), the country's reserve bank, are in the final stages of completing a second master plan for the Thai financial sector, with the plan to be submitted for cabinet approval before the end of the year.
The first master plan, enacted in 2003, set strict minimum capital levels, sharpened the definition of commercial and retail banks, removed requirements for local banks to lend up to 60% of their deposits within their operating area and encouraged banks to either operate nationally or transform into smaller credit providers.
The second programme of reforms is intended to go much further. At its core, the master plan aims to improve the regulatory environment for the banking sector through streamlining regulation without compromising proper oversight or good risk management.
It also targets a raising of efficiency levels through boosting competition in the system via further liberalisation, expanding retail banking and promoting new microfinance business models and players; and enhancing financial infrastructure in the areas of risk management, credit information system, legal reform, information technology, while also upgrading the quality of human resources.
According to Bandid Nijathaworn, the deputy governor of the BOT, the new scheme should be in place by the last quarter of 2009.
"The Ministry of Finance and the central bank have a joint agreement on the master plan and will soon propose it to the economic cabinet. We will educate the Thai and foreign banks about the direction," Bandid told local media in mid-August.
Among the broader outlines of the new master plan so far revealed are proposals to encourage the mergers of smaller local banks, with BOT officials saying such moves would not be subjected to taxation.
Consolidating the banking sector would lead to an increase in efficiency and a reduction in operating costs, which in turn would in time lower the real sector's costs and increase the domestic banking system's competitiveness with foreign banks, Bandid said.
Under the new plan, foreign banks with full branch status will be allowed to extend their operations, increasing branch numbers and service centres, while the opportunity will be given to more overseas players to enter the market. Foreign banks will also be allowed to expand the scope of their activities, with the door to be opened to segments such as microfinance, treasuries and securities depository services.
On August 7, the Thai finance minister, Korn Chatikavanij, said the second master plan would also focus on widening and deepening the public access to funding, changing the present situation whereby some 20% of consumers go to the non-organised market when seeking funds.
"Microfinance could be one option to improve the access to funding for the low-income earners," Korn was quoted as saying by the English-language daily The National. "This could be done through existing financial institutions, which could adopt the Bank of Thailand's ‘people's bank concept'. Or, we could establish a specialised organisation. Both have advantages and disadvantages. The master plan offers the leeway to apply any concept."
Another of the steps the government and the BOT want to take is increasing the role of Islamic finance in the banking sector. Though Thailand has long had regulations allowing for Islamic banking, the segment has not developed as strongly as some had hoped, with the state-owned Islamic Bank of Thailand, which started operating in 2002, dominating the still small sub-sector.
During a meeting with senior Malaysian officials in mid-August, the foreign minister, Kasit Piromya, said Thailand was keen on improving its Islamic finance sector using the experience of its neighbours.
"We already have an Islamic banking industry, but it is still small, so we would like to develop it further," he said on August 13. "We have also agreed to explore a ‘triangular cooperation' on Islamic banking with the Gulf Cooperation Council."
While working with Malaysia may open a few doors for the Thai Islamic banking segment, it will likely always remain a minor component of the overall sector, having to compete with conventional rivals at home and far more powerful and advanced sharia-compliant competitors elsewhere in the region.
Overall, Thailand's banking sector has weathered the global economic downturn quite well, thanks in no small part to lessons learned from the 1997-98 Asian financial crisis, which resulted in a bolstering of risk management practices and heightened levels of corporate discipline and governance. Another factor in the domestic sector's favour has been its low exposure to the international subprime market and toxic assets, meaning most Thai banks had few connections with troubled overseas lenders.
When the proposed changes to the sector are put in place, the Thai banking industry will have an even-stronger base from which to operate, while also being more attractive to foreign investors, allowing it to reach its full potential.