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Global Banking & Financial Policy Review 2007-2008

THAILAND:
Developments in the Legal and Regulatory Framework

Introduction

The Ministry of Finance (MoF) and the Bank of Thailand (BoT) jointly prepared a Financial Sector Master Plan for financial institutions to guide the development of the financial sector over the next 5-10 years. The Master Plan was approved by the Cabinet on January 6, 2004; an English language version can be found on the BoT website.

Pending new legislation includes the Financial Institutions Business Bill, which has passed cabinet approval and is pending in the Office of the Council of State. However, at the current time, an English version of the draft legislation is unavailable.

Financial Sector Master Plan

In order to implement the Master Plan, MoF issued notifications on 30 January 2004 describing the terms, conditions, and procedures necessary to apply for new commercial bank licenses. Local and foreign financial institutions were invited to submit applications for new licenses under the Master Plan by 31 July 2004.

Twelve applications have been approved:

Background

In the aftermath of the 1997 Asian financial crisis, Thailand began an ongoing legal and regulatory reform program aimed at addressing outstanding issues confronting efforts to stabilize and improve the economy crippled by the collapse. These reforms focused specifically on reversing the depletion of net international reserves, correcting systemic problems plaguing the financial sector, counteracting a liquidity shortage which undermined the stability of the real estate sector and resulted in high levels of non-performing loans and curbing general regional economic turmoil. The muted recovery has largely been the result of fiscal stimuli and increased consumer spending, which have resulted in increasing government debt. While large for the region, Thailand’s national debt is still small in comparison internationally.

Following the de-linking of the Thai Baht from the US Dollar on 2 July 1997, the exchange rate dropped from Baht 25 per US$1 to a low of Baht 57 per US$1 in January 1998, and has gradually regained strength, currently in the range of Baht 34.5-35.5 per US$1 (as of March 2007). Official international reserves were US$66.8 billion (as of 22 March 2007).

Governing Laws

Currently, commercial banks and finance companies are subject to two principal laws and numerous regulations and notifications:

Dissolution of Parliament

In February 2006, the Prime Minister dissolved the Parliament and called for elections to be held on 2 April 2006. The results of these elections were subsequently annulled by the Constitutional Court, and new elections are presently scheduled for 15 October 2006. However, these were cancelled indefinitely after the Military’s overthrow of the Thaksin Government. Currently, the constitution is undergoing redrafting and an election is slated to follow.

Recent Regulatory Developments

Saddled with large numbers of non-performing loans, Thailand’s banking sector struggled in the fall-out of the financial crisis. Debt restructuring was facilitated by a newly created Bankruptcy Court (1999), the introduction of reorganization provisions under the Bankruptcy Act and a contractual debt restructuring scheme promoted by the Bank of Thailand. A substantial number of non-performing loans were transferred from commercial banks to asset management companies, and FIDF guaranteed deposits and liabilities of the remaining financial institutions.

The last new banking laws were enacted in 2002:

Draft Financial Institutions Business Bill

Following the 1997 Baht devaluation, Thailand signed an assistance agreement with the IMF which included banking sector reforms. When Thailand left the IMF Assistance Program in June 2000, one of the last remaining legislative reform initiatives was enacting a new financial institutions law. This law was in the final stages of enactment in August 2002 and would have unified the regulatory framework and strengthened the BoT's powers of supervision, monitoring and enforcement.

The bill defined “financial institution business” as commercial banking business, finance business and credit foncier business. The bill would have permitted current regulators to assign to the BoT supervision of specialized parastatal financial institutions, such as the Industrial Finance Corporation of Thailand and the Export-Import Bank of Thailand. The bill retained the existing ceilings on foreign ownership (25%) and foreign directors (1/4), but allowed relaxation on a case-by-case basis.

The bill failed to clear Parliament in 2002 due to the Senate’s insistence on including a cap of interest rate spreads over cost of funds. In May 2005, the Bank of Thailand was forced to redraft the bill because the Finance Ministry failed to submit the original version to the House of Representative in time for it to be considered. Until the new act is passed, the central bank has to rely on Revolutionary Decree No 58, a law proclaimed by a former military-led government, to supervise the credit-card business of non-banks as well as the e-finance laws.

Adoption of BIBOR as a money market rate

Since 4 January 2005, The Bank of Thailand (BOT) has been publishing a reference rate for short-term interest rates, called the Bangkok Interbank Offered Rate (BIBOR) so that banks and companies can have a benchmark rate for short-term fundings, similar to LIBOR. BIBOR is the rate of interest at which banks can borrow funds from other banks in the Bangkok interbank market. BIBOR is intended to promote longer-term lendings in addition to the overnight and on-call loans that are prevalent in the market.

BIBOR is quoted from the contributor panel composed of sixteen representatives of the Thai Bankers' Association and the Foreign Banks' Association. To ensure transparency, all individual quotes are available on screen, together with the average rate and its standard fixing process and calculation methodology. BIBOR is calculated from the average of rates at which commercial banks offer to lend funds to other banks on an unsecured basis, dropping the upper and lower quartiles for calculation. Tenors quoted range from one week to one year.

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Revised: 31 Jul 2008 15:07:13 +0700