The University of Hong Kong School of Economics and Finance FINA0501 Asian Financial Institutions Term Paper Overview of Thailand’s Financial Institutions (Banking Sector) Submitted by Lo Ka Yiu, Timothy BBA(Law) II U.
No. : 2003506031 Overview of Thailand’s Financial Institutions (Banking Sector) Submitted by Lo Ka Yiu (2003506031) Introduction With the glorious history of achieving an average GDP growth of 11. 5% from 1987 to 1996, Thailand was acclaimed as one of Asia’s Tigers in the 1990s (Deepak, 1997).However, ironically, this is the same country which suffered a sharp depreciation of its currency, bath, and the ensuing economic downturn in the 1997 Asian Financial Crisis.
Poor supervision over financial institutions, especially commercial banks, has been generally regarded as a key reason for Thai economy’s rapid collapse (Vatikiotis, 1998). Therefore, Thailand’s financial institutions, which have been largely restructured by the authorities after the crisis, are a topic of value. This paper will take an overview of Thai financial institutions, with a focus on the banking sector.
Historical Background Thai banking system dates back to 1888 when the Hong Kong and Shanghai Banking Corporation established its branches there. Subsequently, the Chartered Bank in 1894, and a French bank called Banque de I’ Indochine in 1897 also established branches in Thailand. These banks share the same purpose of facilitating trading between their home countries and Thailand (Blanchard, 1958). Chinese people of Thai nationality began the domestic banking industry in Thailand during the early 1900s. They saw opportunity in Thai banking industry because of the lack of law governing it.Although massive speculative pressures resulted in the failure of these early banks, new banks formed and adapted to avoid the mistake made by previous attempts (Blanchard, 1958). In the past, Thai banking and financial systems were traditionally controlled by a limited elite group of business from approximately ten families (Traisoral, 2000). Overall framework of the Thai Financial Institutions The current banking system in Thailand consists of the following components: a.
A central bank, namely the Bank of Thailand (BOT) b. 12 domestic and 18 foreign commercial banks . 27 international banking facilities (IBF) d. 4 specialised banks, namely the Government Saving Bank (GSB), the Bank of Agriculture and Agricultural Cooperatives (BAAC), the Government Housing Bank (GSB) and the Export-Import Bank of Thailand (EXIM Bank) Note that there is an overlap between the commercial banks and IBFs. Among the 27 IBF licenses, 8 are currently held by domestic commercial banks, 15 by foreign commercial banks.
Other financial institutions include credit foncier companies, financial companies and securities companies (Bank of Thailand, 2005).Central to the economic crisis during 1997 are the central bank and commercial banks. We will now explore these financial institutions in a more specific way. Banking Sector 1. The Central Bank Thai National Banking Bureau, established in 1939, was the first organization assuming the responsibilities of a central bank in Thailand. It was a department attached to the Ministry of Finance. During the Second World War, the Thai government saw the success that other countries were experiencing from a strong central banking system. As a result, the Bureau was turned into a central bank, i.
. the Bank of Thailand, with the passing of the Bank of Thailand Act in 1942.The Bank of Thailand has been given many responsibilities, including the following: i) Formulate and recommend monetary policy to the Thai Government ii) Provide banking services to the government, state enterprises, and financial institutions, iii) Oversee financial institutions and their support of economic development, iv) Supervise and develop the financial systems, v) Promote the economic sectors with priority, vi) Print and issue bank notes, vii) Manage Thailand’s international reserves, iii) Represent Thailand during international meetings and keep good relations with other central banks, ix) Provide and distribute information on the economic condition of Thailand both within the country and abroad, x) Act as the lender of last resort to other banks Nevertheless, the Bank still has some limitations in powers. It is not responsible for the development of a capital market, and it has little control over short-term credit (Blanchard, 1958). Both on-site and off-site methods are adopted by the Bank of Thailand to supervise financial institutions in Thailand.On-site methods are unannounced physical inspections conducted at least once a year for each Thai registered commercial bank. Off-site methods require all financial institutions to submit weekly, monthly, or annually reports over every area of operations (Supervision Group Policy, Bank of Thailand, 2002).
Currently, the Bank of Thailand has 4 regional branches, which perform central banking activities in there locality. The North Eastern Region Office is located in Khon Kaen, the Southern Region Office is located in Songkhla, while the Northern Region Offices are located in Chiang Mai and Lampang (Sunsite Thailand, 2005). 2.Commercial Banks Commercial banks dominate Thailand’s financial sector by holding 73% of both household savings and credits extended by all financial institution (Elgar, 2003). All commercial banks are established under the Commercial Banking Act and need the authorization from the Ministry of Finance.
They are monitored by the Bank of Thailand and bound by numerous regulations. For instance, they must meet minimum capital requirements in order to be incorporated. They must transfer at least 15% of their profits into reserves, and dividends are limited to 15% of reserves until the amount of reserves exceeds 60% of their paid-in capital.They must also maintain a capital adequacy of approximately 10% to the two tiered capital standard set by the Basle Committee in the 1988 Capital Accord (Traisorat, 2000).
The major business areas of commercial banks include taking time, saving and current deposits, issuing certificates of deposit, securing domestic and foreign loan, lending, buying and selling of foreign exchanges, as well as trading bills of exchange and tradable financial securities. Commercial banks normally provide credit in the form of overdrafts which are on a short-term basis but may be rolled over on a year-to-year basis.Due to fluctuations in interest rates both in the international and domestic markets, commercial banks at present encourage customers to utilize term loans instead of overdrafts. Recently, some commercial banks have been allowed to apply for additional licenses from the Bank of Thailand to expand their scope of business into different new areas, such as information and consultancy services, underwriting sales of government and state enterprise securities, as well as acting as debt collection agents (Haron and Yamirudeng).
3. Specialised BanksWhile all the 4 specialised banks are owned by the Thai Government and under the supervision of the Ministry of Finance, each of them has its own position in the Thai financial industry. The Government Saving Bank (GSB) was established in 1913 with the aim of educating court officials on banking services, and encouraging the habit of saving among the Thai, especially the low and middle income groups. It has an extensive network of branches and mobile units to accept deposits all over the country. Apart from savings service, it is also providing various services for the public sector, general public and business sector.The Bank for Agriculture and Agricultural Cooperatives (BAAC) was established in 1966 to provide credit to the agricultural sector, with the aim of promoting a better standard of life for Thailand’s farming population. Nowadays, it has gradually transformed from a specialised agricultural lending institution to a diversified rural bank which provides different kinds of financial services. The Government Housing Bank (GHB) was set up in 1953 to provide mortgage loans at a low interest rate in order to assist low and middle income groups in purchasing houses.
It specializes in providing long-term mortgage loans for individual borrowers, construction loans for private developers for land and housing development projects, and construction loans for land owners who want to develop rental apartments. The Export-Import Bank of Thailand (EXIM Bank) was established in 1993 to provide support for international trading and foreign investments, in order to help the growth of Thai exporters and investors. It practises in different areas, such as offering direct loans and guarantees loans, insuring exports and providing financial services.Besides, it also provides advice to Thai exporters and investors. Other Financial Institutions Besides banks, finance companies and securities companies also play an important role in Thailand’s financial sector.
In the past, it was commonplace that a company got two licenses, one for finance business and one for securities business. Such a company was called a “financial and securities company”, and it could operate in both fields. In 1992, the Bank of Thailand separated these two practising areas.
Currently, finance companies are intermediaries in the money market, and regulated by the Bank of Thailand; while securities companies, practising in the capital market, are monitored by the Securities and Exchange Commission (SEC). We will now explore these two types of financial institutions in more detail. 1. Finance Companies The areas of operation of finance companies include selling agent, underwriting, arranging for debt securities, representing of holders debentures, custodial service, registrar, and managing provident funds and private funds (Survey of Thai industry).Financial companies cannot raise fund by deposit, but they can accept deposits in terms of issuance of bills of exchange and certificates of deposits. They can also mobilize fund by issuing promissory notes and borrowing from the commercial banks. The major uses of fund are loans for commerce, loans for development, loans for consumer products and loans for housing. However, after the Asian financial crisis in 1997, due to the severe economic downturn and the collapse of property and stock markets, a number of finance companies were facing the problem of liquidation.
Nine finance companies were ordered to ecapitalize in 1997 (Traisoral, 2000). There were 91 finance companies in 1996, but only 21 left in 2000 (Chandler, 2000). Now, there are only 18 (Bank of Thailand, 2005). In order to facilitate the financial reform and restore public confidence, a lot of rules and regulations have been set and amended. 2.
Securities Companies Securities companies are those engaging in investment banking activities like brokerage, underwriting and giving advice about securities. As mentioned, since 1992, securities companies have been regulated by the Securities and Exchange Commission.Current Trends in Thailand’s Financial Sector Now, we have gone through the general framework of Thailand’s financial institutions. It is time to look at what is happening in the industry. In general, two trends are taking place. One is the foreign entry into the Thai commercial banking sector, the other one is the restructuring of the financial sector. 1.
Foreign Entry into the Commercial Banking Sector Even before the Asian Financial Crisis, the authorities had started to liberalize the Thai commercial banking system. The Bangkok International Banking Facility (BIBF) was created in March of 1993.It gave 32 foreign banks licenses to provide Thailand banking facilities. The Bank of Thailand made a similar move in 1995 when it announced that it would issue up to 14 new commercial bank licenses, half of which would be foreign and half domestic (Demaine 1997). After the Crisis in 1997, in order to restore investors’ confidence in the Thai banking system, the Government reinforced its effort to accelerate liberalization. As a result, it relaxed the existing foreign shareholding restrictions on domestic commercial banks (Traisoral, 2000).The banking sector attracted US$2. 3 billion of foreign direct investment in 1998 and US$2.
5 billion in 1999 (Bank of Thailand, 1999). Since the eruption of financial crisis, a few commercial banks have been taken over by foreign banks. At the end of 1999, DBS Thai Danu Bank (DTDB), Bank of Asia (BOA), Standard Chartered Nakornthon Bank(SCBN) and UOB Radanasin Bank (UOB-RAB) were the 4 commercial banks which were controlled by foreign corporations. For Thailand, the entry of foreign banks does have it positive effects.
Those foreign banks can provide sources of capital, raise the level of technology, and introduce new management philosophies as well as marketing strategies. For example, BOA has increased its number of ATMs, and launched mini branches in subway stations and supermarkets; while UOB-RAB has launched a flexible mortgage-loan package with low interest rates (Montreevat, 2000). Simply put, the competitiveness of the whole banking industry has been enhanced as a result. 2. Restructuring of the Financial Sector The Thai authorities initiated a series of tough measures in relation to domestic financial institutions.
Quite a number of unsafe and unsound finance companies have been closed and the remaining ones are subject to strict prudential conditions and supervision. The Bank of Thailand did exercise its enhanced powers to order changes of management in some commercial banks and a finance company. In order to rebuild investors’ confidence, it is foreseeable that this restructuring process will continue.
Conclusion This paper has presented an overview of Thailand’s financial institutions with a focus on the banking sector.We first looked at its historical background, and then explored different components in the sector, including the central bank, commercial banks, specialised banks, finance companies and securities companies. At the end, two current trends, namely the foreign entry into Thailand’s commercial banking sector and the restructuring of the financial sector, were discussed. As mentioned at the beginning, it is widely agreed that the ineffectiveness of the Thai banking sector is at least partly to blame for Thailand’s suffering in the Asian Financial Crisis.