ECONOMIC SPOTLIGHT - EXCESS MONEY HURTS THAI BANKS
Thailand's improving economy may have
helped its trade and finance position but it has also created
major problems for local banks, Thai and foreign bankers said.
    They said a 900 mln dlr saving from cheaper imported oil
and 19.7 pct export growth last year contributed to the
country's first current account surplus in 20 years.
    But the bright picture, together with a government program
to help farmers cope with depressed commodity prices, coincides
with sluggish investment by a private sector still feeling the
lingering effects of the 1984-86 recession.
    Thai banks have had growing surplus funds and difficulties
finding borrowers since the third quarter of 1986.
    Kunthon Narkprom, head of the budget and planning division
of Thai Farmers Bank Ltd, estimated excess liquidity in banks
peaked last month at 60 billion baht, three times what he
considered normal. Bank of Thailand figures show total deposits
in 1986 grew 12.7 pct to 627.7 billion baht, while lending rose
only 3.4 pct to 548.6 billion.
    The lending/deposit ratio, which measures bank loans as a
percentage of deposits, fell to 86.6 pct last month, the lowest
since the 1970s, after averaging 96.6 pct in 1985.
    Thai banks have cut lending and deposit rates a record six
times since January 1986, during which time the average minimum
loan rate fell to 11.5 pct from 15.5 and the gross one-year
fixed deposit rate to 7.25 pct from 11.
    Five banks announced last week they would cut their maximum
lending rates to small borrowers by one percentage point to 14
pct.
    Kunthon of Thai Farmers estimated banks now have a combined
80 billion baht unused overdraft line as many small and
medium-size companies delay borrowing in anticipation of more
cuts in interest rates.
    The record liquidity has seriously hurt the profits of
banks, which have been forced to invest idle funds in low-yield
government securities.
    Kunthon said the banks hold four to 10 billion baht in
short-term government bonds bought through the Bank of
Thailand's bond repurchase facility, double the normal amount.
    Thailand's 16 local commercial banks registered one of
their worst years in 1986, with overall profits falling over 30
pct after a 14 pct decline in 1985.
    Kunthon said profits should increase 10 pct this year as
the banks adjust to the new interest rate structure.
    Olarn Chaipravat, senior executive vice president of Siam
Commercial Bank Ltd, told reporters last week the liquidity
problem stems partly from the fact most loan demands come from
businesses seeking funds for small, labour-intensive projects.
    He said there are few large, capital-intensive projects and
many borrowers go offshore to meet their requirements.
    Somboon Chinsavananond, Thai Farmers' fund management
executive, said liquidity has been aggravated by the central
bank's policy of fixing a stable baht-dollar exchange rate
which permits Thai companies to import dollar-denominated funds
with a minimal risk of currency exchange losses.
    He said underlying bearishness towards the U.S. Dollar has
encouraged foreign borrowers who hope to pay less on loan
principal when their loans mature.
    Thai bankers said central bank governor Kamchorn Sathirakul
last month rejected a request to increase a 10 pct withholding
tax on interest on foreign loans, a measure they said would
reduce foreign borrowings. The governor replied the bankers
should extend more loans to rural areas instead.
    Bankers said some Thai banks have offered credit-worthy
clients loans at near money market rates of seven to eight pct
in a bid to compete with foreign funds.
    A market analyst at Siam Commercial Bank said bank lending
at such rates amount to about 15 pct of all loans extended by
the industry.
    A foreign banker, who requested anonymity, said the
"segmented market approach" used by Thai banks for setting
different lending rates has caused dislocation of funds in the
financial sector, eroded bank profits and prevented banks from
taking a more logical move of further cutting interest rates.
    He said the liquidity problem gives the Bank of Thailand a
perfect opportunity to assert more control on the Thai money
market.
    The Bank of Thailand is taking "a step in the right
direction" by planning to float three billion baht in bonds to
mop up part of the surplus, he said, but he added the bank has
been lax in using its bond repurchase window as a tool to
absorb or inject liquidity into the market.
    William Wu, head of the Treasury Unit of Chase Manhattan
Bank N.A., Said the money market lacks the instruments to
absorb liquidity and avoid sharp interest rate fluctuations.
    He said the liquidity has fuelled the stock market's
strongest rally in seven years and Thailand should seize the
opportunity to develop the corporate bond market.
 REUTER
