Kriengsak Chareonwongsak Private financial institutions will benefit

Private financial institutions will benefit

Here, the phrase “private financial institutions” includes foreign creditors who are major shareholders in Thai financial institutions.

The first benefit gained by financial institutions is public participation in debt repayment. In other words, public taxes would be used to cover NPL losses. Under provision of the TAMC outlined above, private financial institutions would have to shoulder a maximum of 30% losses on NBV. Hence, up to 70% of losses on NBV could be borne by the TAMC.
Because of this, financial institutions could begin to transfer their worst NPLs – those that cannot be restructured – to the TAMC. Why keep NPLs that – either in their own hands or in the hands of the TAMC – would result in guaranteed losses? Thus, in most likelihood, NPLs that have a high probability of losses greater than 40% would be transferred first. As a result, financial institutions may begin to view the TAMC as an easy way out of heavy financial losses.

Second, by transferring NPLs to TAMC, financial institutions could gain greater stability in the short term. Transferring NPLs to the TAMC would ease pressures on private financial institutions to recapitalize, since – according to the Capital Adequacy Ratio (CAR) established by the previous government – each financial institution was responsible to recapitalize to 11.5% of their assets, a standard higher than the Bank for International Settlement (BIS) standard. Thus, by transferring NPLs, there would be less need to worry about recapitalization over an intermediate period of time.

The last advantage gained by the terms of the TAMC is they can gain better rates of return by treating TAMC interest notes as cash in hand. And how would this be done? Financial institutions that transfer their NPLs to the TAMC are guaranteed interest in the form of interest notes from the TAMC. Because these notes could be viewed as tradable funds, financial institutions could – in a pinch – use their TAMC notes in lieu of cash. As a result, financial institutions have more with which to make a profit. 

Social security for small businesses - losses and gains

Professor Dr Kriengsak Chareonwongsak
Executive Director, Institute of Future Studies for Development (IFD)
kriengsak@kriengsak.com, http://www.ifd.or.th

Kriengsak Chareonwongsak The government will benefit

The government will benefit

The first advantage gained by the government would be enhanced credibility in the eyes of the international community and domestic interests alike. Establishing the TAMC would fulfill one of the government’s election promises, namely, to establish a national-level AMC to cope with chronic NPL problems.

However, persuading private financial institutions to transfer bad debts to the TAMC may be easier said than done. The success of the TAMC is contingent on the new government’s ability to loosen overly stringent regulations that robbed the previous AMC of success. If the present government holds to its strict criteria in the early stages of establishing its TAMC – such as purchasing NPLs at 10-20% lower than NBV or penalizing only private financial institutions in the case of losses – private financial institutions will be sure to withhold their cooperation. If this happens, the government will be forced to revert to the NPL coping measures used by the previous government, which allowed each bank to operate its own private AMC. This would, in effect, cancel the political benefit obtained by the current government from its Urgent Policy List, considered one of its core economic recovery strategies. 

Second, if the TAMC solution works, the government would shield itself somewhat from accusations of using public taxes to subsidize financial institutions. Creating the TAMC could decrease strain on the budget. Under the old National AMC proposed plan, the government assumed full responsibility for all NPLs within the AMC network. However, under the new TAMC scheme, the government is only partially responsible for private institution NPLs; its responsibility only partially begins when loses on NPLs have reached the 21% mark-of-NBV. Structuring liabilities on NPL losses in such a way places a heavier responsibility on private financial institutions compared with the previous proposed National AMC scheme.

Social security for small businesses - losses and gains

Professor Dr Kriengsak Chareonwongsak
Executive Director, Institute of Future Studies for Development (IFD)
kriengsak@kriengsak.com, http://www.ifd.or.th