Printer Friendly

Thailand lowers interest rate to cut bad loans.

BANGKOK, July 2 Kyodo Thai bankers are continuing to lower interest rates on deposits to free up the excess liquidity of debtors for use in reducing bad loans and may continue to push rates down further this year despite angering depositors.

Reducing nonperforming loans has been the primary task facing the Thai financial system since the Thai economy plunged into crisis with the government's July 2, 1997, decision to float the baht.

The 2,708 billion baht (73 billion dollars) in total nonperforming loans, or about 47.03% of industry-wide loans as of March 31, appeared to decline in April and May, according to the Bank of Thailand, the country's central bank.

Interest rates have been falling since the beginning of the year and may continue to decline continuously until the end of this year, said Anusorn Tamajai, assistant vice president of Citibank (Thailand).

Banks currently pay 4-5% on deposits while charging 8-12% for loans.

The lower interest rate on deposits has been encouraging companies with so- called strategic nonperforming loans to tap existing money in deposits to pay off their restructured loans on which interest has been reduced, Anusorn said.

Strategic nonperforming loans, which make up about 20-30% of all nonperforming loans, arise in cases where companies refuse to meet debt repayment commitments despite having cash deposits.

Nonperforming loans arise when a debtor fails to make payment on a loan for three consecutive months.

The situation has prompted Thailand's banks to lower interest rates on deposits to below the interest rates that debtors must pay on restructured loans. Previously, debtors benefited from leaving their money in bank deposits where they could earn higher returns for paying debts later.

But so-called good debtors * those without strategic nonperforming loans * are getting punished by the system by still having to pay the full interest on debts on schedule, while receiving less on their deposits.

Holders of strategic bad loans, by contrast, receive a relaxation or rescheduling of repayment and a fee reduction for property transfers.

"At this moment, nobody wants to be a good client of the bank due to the absence of incentive. If the situation is prolonged, it will create moral hazard in Thailand's business culture," said Anusorn of Citibank.

The cut in deposit interest provides a good incentive for debt-ridden firms to even settle bad debts other than strategic nonperforming loans, he said.

But a senior banker said the reduction of interest rates on deposits is meant to reduce excess liquidity and not bad loans.

"Nonperforming loans are another problem that will be solved by debt- restructuring. We never use interest rate as a means to cut bad loans," said Paiboon Wattanasiritham, director general of Government Savings Bank.

The Bank of Thailand has set up the Corporate Debt Restructuring Advisory Committee to help debt-ridden firms and their creditors deal with bad loans. At the end of April, debt restructuring cases increased to 39,114, reducing corresponding outstanding loans to 383.65 billion baht (10.36 billion dollars), according to the committee.

But while successful debt restructuring may help reduce nonperforming loans in Thailand, it has no reflection on the quality of remaining loans, a banker at state-owned Krungthai Bank said.

"Only 30% of the so-called successful (debt restructuring) cases are good loans, the other 70% are still bad," he said.

Thailand may take years to settle the nonperforming loans remaining in all industries since all parties concerned, companies and banks, want to maintain the status quo. Meanwhile, banks continue to restrict their lending while lowering the interest they pay on deposits.

Effective June 25, the central bank cut its discount rate * the lending rate it charges on loans to commercial banks * from 7 to 5.5% to encourage financial institutions to issue more loans.
COPYRIGHT 1999 Kyodo News International, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1999 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Publication:Asian Economic News
Date:Jul 5, 1999
Previous Article:Stocks in H.K., Thailand, Taiwan all rise.
Next Article:Mixed reaction to baht value after two years float.

Related Articles
Thai stock index climbs more than 8 pc.
Thailand unveils stimulus package to buoy economy.
Lower U.S. interest rates to help Thai economic recovery.
New Thai central bank chief to adjust interbank rate.
Kyodo economic news summary -5-.
Kyodo economic news summary -4-.

Terms of use | Privacy policy | Copyright © 2022 Farlex, Inc. | Feedback | For webmasters |