Fair play: Commercial and socially oriented banks spar over territory

Alongside commercial banks Thailand has licensed a range of state-owned financial companies with mandates that go beyond banking profits, incorporating social benefits and national development goals. Tensions between this group of eight specialist lenders and commercial banks increased in 2011.

Not all of Thailand’s state-owned lenders are in the crosshairs. The government is the largest shareholder in Krung Thai Bank, the country’s second-largest lender by assets. However, Krung Thai is not a specialist or development bank, but one following the universal model for commercial banking, albeit with often friendly deposit rates for customers. It is many others, such as the Government Savings Bank, the Bank for Agriculture and Agricultural Cooperatives, and the Government Housing Bank have drawn the ire of commercial banks.

INTEREST MARGINS: One of the biggest impacts the state lenders are having is in contracting interest margins. They drive up the cost of deposits by offering higher rates, forcing private banks to compete. They drive down the cost of loans to customers, further eating into the private banks profits. “Right now they are providing a lot of soft loans,” Pimpaka Nichgaroon, the head of research for Thanachart Securities, told OBG. “Commercial banks are having a hard time with this.’’ One factor that leads to higher deposit rates is the need to fund government projects, according to Yuttachai Teyarachakul, the executive director of the Thai division of United Overseas Bank, a Singapore-based lender. Yuttachai told local media in July 2011 that government lenders are now being counted on to fund BT100bn ($3.19bn) in projects. Soros Sakornvisava, the former president of the Small and Medium-Sized Enterprise (SME) Development Bank, one such government entity, told OBG that his bank “does not provide just uncollateralised loans to SMEs – it also provides a range of value-added services, such as advisory and capacity-building services through its development department, upgrading production standards, focusing on organisational development and marketing assistance.”

TURF WARS: These government lenders are supposed to serve different clients than the normal banks, but some say those territorial boundaries are not being respected. The Bank for Agriculture and Agriculture Cooperatives, for example, was conceived as a method for extending credit to small farmers but now lends to large-scale agricultural processing firms. For commercial banks, the problem is competing on an even footing with institutions for which maximising profits is a secondary goal. The state-owned lenders also do not have the same reserve requirements because they are not subject to mandatory oversight by the Bank of Thailand. Another example of different treatment took place in 2012 the when the BOT announced the levy to help pay down BT1.14trn ($36.4bn) in Financial Institutions Development Fund (FIDF) debt, a vehicle used to absorb bad debts and banks during the 1997-98 financial crisis. The state-owned banks were told by the Ministry of Finance they would have to pay too.

Going back to their roots would mean staying away from commercial banking territory, and a resumption of traditional activities such as servicing specific industries or government workers. Thai laws give these firms several advantages in these areas, such as the requirement that all state-owned enterprises patronise a state-owned bank. State-owned enterprises that wish to invest in bonds, securities or other investments that provide a higher rate of return than a bank savings account must instead invest in the securities of a government entity, which inflates the potential market for bonds and other securities issued by these lenders.

A recent World Bank study on the state banks arrived at conclusions consistent with the commercial banks’ complaints. “A key challenge for the banking system is the relative under-regulation of state-owned banks,” Mark Arnold, the president and CEO of Bank of Ayudhya, told OBG. “There should be a strict segmentation of their niche markets so they do not cannibalise each other’s business, while similar reserve requirements should be applied to them to ensure a level playing field.”