Thailand’s banking sector has gone through many economic crises over the past few decades, the latest being the COVID-19 pandemic. Despite their preparation, new risks and challenges continue to test banks’ resilience.
Banks and other types of financial institutions that survived the 1997 Asian financial crisis have gone from strength to strength. The industry, as well as the Thai economy, was not greatly affected by the global financial crisis of 2008. They are again tested, by the persistence of the COVID pandemic and the fallout from the Russian invasion of Ukraine.
A bank-based economy
Banks play a crucial role in the Thai economy, referred to as the banking economy. Financial institutions served both depositors and borrowers, fueling economic growth. A bank-based economy is different from capital-based economies, such as in the United States, where businesses largely raise funds through the capital market, the stock market.
The Bank of Thailand (BOT), which oversees banks operating in the country, recently launched a “Financial Landscape Advisory Paper,” on consulting stakeholders on how to deepen financial sector reform.
Four degraded banks
The BOT move coincided with S&P Global Ratings downgrading four banks’ credit ratings last month – Kasikornbank and Siam Commercial Bank to BBB from BBB+, and Krungthai Bank and TMBThanachart Bank to BBB- from BBB.
The international rating agency has raised concerns about the quality of loan portfolios as many businesses and individual borrowers are severely affected by the impact of lockdown measures both in Thailand and abroad aimed at contain the pandemic.
In recent years, banks have also faced technological disruption, leading to the entry of new competitors and new types of services.
“The challenge for banks is how to cope with rapid changes in technology,” said Chaiyawat Wibulswasdi, former governor of BOT. He was referring to financial technology and the emergence of cryptocurrency and other types of digital assets.
BOT Deputy Governor Roong Mallikamas, however, said Thai banks have done quite well in adapting to rapid changes in technology, as they have invested in information technology and built a solid IT infrastructure. They have also taken over fintech companies or launched joint ventures with startups, as banks have to battle with new competitors, especially foreigners entering their payments business territory.
Recognizing their performance in this area, the central bank recently lifted a limit on technology investments to 3% of capital.
Online banking a success
Thai banks have benefited from the central bank’s launch of the PromptPay infrastructure, allowing consumers and businesses to conduct financial transactions through online banking services such as QR code and phone number windows.
“Online banking has brought huge savings to banks because it is much cheaper to provide service online than to meet face to face at bank branches,” said former governor Veerathai Santipraphob. of the BOT. This allowed them to reduce their service fees for customers, he said.
During Veerathai’s tenure, bank customers often complained about bank staff at their counters trying to sell them unwanted insurance policies. The central bank therefore had to step in and ask the banks to abandon such a selling strategy, according to Veerathai.
Yet technology also brings cyber risks. Last year, many credit and debit cardholders fell victim to online fraud and saw money disappear from their accounts without their approval. In recent years, many customers have expressed disappointment with the slowness of banks to compensate them.
Central bank assures Thai banking system remains resilient despite S&P downgrade
With the emergence of digital assets, such as cryptocurrency, several Thai banks have invested in digital asset exchanges, hoping to cash in on the popularity of crypto trading among local investors.
But since digital assets are also associated with risks for individual investors and financial stability, the BOT and the Securities and Exchange Commission (SEC) have imposed strict rules governing digital businesses.
The BOT has limited banks’ investment in digital assets to no more than 3% of equity. Cryptocurrency has been banned from being used as a means of payment for goods and services.
The central bank is also seeking to further liberalize the financial market.
The BOT aims to license virtual banks this year. The virtual bank does not have a physical office, as its operations and services are online. Deploying state-of-the-art technology, this type of bank will employ few staff and could provide cheaper and faster loan services. Some banks have currently introduced AI to make loans as they try to take advantage of new technologies and compete with potential new competitors.
How strong are the banks?
S&P Global Ratings downgraded the ratings of four Thai commercial banks while maintaining the ratings of the other two banks, Bangkok Bank and Bank of Ayudhya. The rating agency pointed to the build-up of fragility due to rising household debts and higher number of debtors due to regulatory treatment which allowed Thai banks to provide more financial relief to debtors compared to other countries.
In addition, the fragile recovery, particularly in the tourism sector, as well as the potential negative impact of Russian-Ukrainian tensions, could affect the quality of bank lending going forward. Nonetheless, S&P noted that the outlook for these banks is stable given that they are well capitalized with high levels of loan loss provisions.
In response to S&P’s concerns, BOT Deputy Governor Ronadol Numnonda, who is in charge of the stability of financial institutions, argued that the BOT has put in place several measures to encourage banks to continuously assist banks. debtors concerned in order to facilitate their post-COVID recovery.
At the end of 2021, the number of debtors under the financial relief program stood at 14% of total loans – a significant reduction from the peak of 30% in July 2020 during the outbreak. COVID-19 outbreak in Thailand. Since then, it has become clear that debtors who left the financial assistance program have regained their debt service.
He assured that currently the financial positions of the Thai banking system remain resilient with high buffer levels. The capital adequacy ratio (BIS ratio) stands at 20% and provisioning increased by 430 billion baht in 2020-21. This reflects banks’ vigilance in a context of heightened uncertainty. The 890 billion baht provisioning in the banking system is equivalent to 1.6 times non-performing loans, he said.
Additionally, the BOT required regular stress tests on bank capital (2021-23) and found that the Thai banking system remained resilient and would be able to withstand future risks and uncertainties. Going forward, the continued recovery of the Thai economy will help improve borrowers’ incomes and debt service as well as banks’ lending quality, Ronadol added.
From April, the BOT introduced a new benchmark for banks and other types of financial institutions to practice in order to treat customers fairly regarding service charges, fees, interest and fines. Banks are required to disclose this information to customers. Banks must return fees charged to ATM and debit cardholders if customers cancel those cards before their expiration date. Banks are not allowed to charge a commission based on the percentage of borrowers’ loans for collateral valuation services.
By Thai PBS World’s Business Desk