The next wave of change

With the financial master plan ushering in a long-awaited consolidation, optimism is rising that local institutions will finally achieve the size and scale needed to be competitive and immunised from external shocks

By DARANA CHUDASRI

The economic crisis in 1997 saw the closure of dozens of finance companies and a handful of banks suffering from a wave of loan defaults and deposit runs.

Seven years later, the Thai financial sector appears poised to undergo a new wave of change, one precipitated no so much due to immediate financial troubles, but rather regulatory pressure aimed at streamlining and strengthening the sector for the future.

Bank of Thailand officials plainly speak of their expectations that by 2005, the financial sector should shrink in half, in part due to mergers among institutions seeking to upgrade their position, in other parts due to voluntary downsizing.

The financial sector master plan, approved in January, aims to streamline the sector, overhaul the regulatory and supervisory framework and expand financial services to rural communities. The timing of the regulatory changes comes at a time when Thai banks have been reporting record profit levels, thanks to low interest rates, the strong economy and pickup in private investment and consumer spending.

One of the greatest changes under the plan is the elimination of finance companies and credit fonciers. Finance companies, long an underclass to commercial banks, can now upgrade to either full-service or retail bank licences or face being stripped of their ability to raise public deposits and relegated to the role of credit companies.

Companies seeking to upgrade to full-service licences must maintain capital of more than five billion baht and merge with at least one other institution. Retail banks face a much smaller capital requirement at 250 million baht, but face restrictions in their potential client pool and services and products permitted.

Banks have adopted various innovative approaches to draw and retain customers.

Foreign banks face a similar choice. The plan requires them to consolidate operations under a "single presence" concept, with international banking facilities to be eliminated. Foreign banks can upgrade to a subsidiary status, allowing the opening of new branches upcountry.

For commercial banks, the new plan poses fewer challenges. Thai banks, since the crisis, have already undergone waves of restructuring to cope with increasing competition and changes in the marketplace.

The small-tier banks have come under the greatest difficulty, with two hybrid banks, Bank of Asia and DBS Thai Danu, both announcing changes in the first half of the year in the face of growing market pressure. ABN Amro announced it was selling off its majority control in Bank of Asia to Singapore's UOB as part of a plan to focus resources on China. UOB is widely expected to merge Bank of Asia with UOB Radanasin.

DBS Thai Danu, meanwhile, has merged with Thai Military Bank and the Industrial Finance Corporation of Thailand, a deal expected to be completed by November.

The shareholder manoeuvres among banks represent just another step in the changes that have continually faced the sector over the past several years.

Perhaps one of the most significant developments to occur over the course of the Thaksin Shinawatra government has been the role of state-owned banks in the economy. Since 2001, state banks such as Krung Thai Bank, BankThai and Siam City Bank have largely focused on aggressive loan growth. Thanks to state policies stripping out their dud loans to the Thai Asset Management Corp, state banks looked to rapidly build up their asset portfolios to justify their large capital bases and assist government policies aimed at boosting economic growth.

Low-interest loans drew keen interest among prospective homebuyers at the recent Money Expo.

Freed from their bad loans and faced with less provisioning needs than private banks, state-owned banks quickly cut their lending costs to draw customers from other institutions and pump funds into the economy.

From 2001 to 2003, private banks, wary of entering into a price-cutting game or easing risk management standards that were implemented to avoid the mistakes of the past, have mostly concentrated on internal reforms aimed at boosting their internal efficiency.

With the corporate market still weak and the best companies able to turn to the bond and equity markets, attention turned to the consumer retail market. A number of banks, notably Kasikornbank, Bank of Ayudhya and Siam Commercial Bank, launched change management programmes aimed at increasing their retail presence, with millions of baht in new investments made on rebranding exercises, branch redesigns and new technology and partnerships to help lock in customer loyalty.

Operations for most Thai banks have since been centralised, with credit functions managed through regional hubs and products clearly segmented between retail customers, small businesses and large companies.

Branches now mostly serve as marketing points of contact for customers, with recent redesigns aimed at emphasising the "user experience".

With these changes now mostly complete and the economy firmly on a growth path, private banks have taken a more aggressive stance and are actively increasing their marketing activities to build up customer share.

Looking to the future, authorities say that the financial master plan will remain the main development framework for at least the next three years, with no new entries permitted into the sector.

Further changes are expected to come over the next several years with the passage of a new financial institutions act and a limited deposit insurance programme replacing the current blanket guarantee offered on deposits. Financial institutions will also face the need to change their risk management processes once the new Basel II framework comes into effect, replacing the current guidelines used by banks around the world to match capital relative to their loan assets.

While the central bank has announced that Thai banks will be required to comply with the new framework, implementation will likely be phased in over the latter part of the decade.