Thailand’s banking industry has waded through many economic crises in the last few decades, the latest being the COVID-19 pandemic. Despite their preparedness, new risks and challenges continue to test the banks’ resilience.
Banks and other types of financial institutions that survived the 1997 Asian financial crisis have become stronger. The industry, as well as Thailand’s economy, was not much impacted by the global financial crisis in 2008. They are being tested again, by the persisting COVID pandemic and the fallout of Russia’s invasion of Ukraine.
A bank-based economy
Banks play a crucial role in Thailand’s economy, which is labeled a bank-based economy. Financial institutions have served both depositors and borrowers, fuelling economic growth. A bank-based economy is different from capital-based economies, such as the United States, where businesses largely raise funds via the capital market—the stock market.
The Bank of Thailand (BOT), which supervises banks operating in the country, recently launched a so-called “financial landscape consultative paper”, on consulting with stakeholders about how to deepen financial sector reform.
Four banks downgraded
The BOT move coincided with S&P Global Ratings last month downgrading the credit rating of four banks — Kasikornbank and Siam Commercial Bank to BBB from BBB+, and Krungthai Bank and TMBThanachart Bank to BBB- from BBB.
The international rating agency raised concerns over the quality of loan portfolios, as many businesses and individual borrowers are hurt badly by the impact of lockdown measures both in Thailand and overseas aimed at containing the pandemic.
In recent years, banks have also been facing technology disruption, leading to the entry of new competitors and new kinds of services.
“The challenge for banks is how to deal with rapid changes in technology,” said Chaiyawat Wibulswasdi, former BOT governor. He was referring to financial technology and the emergence of cryptocurrency and other types of digital assets.
BOT assistant governor Roong Mallikamas, however, said that Thai banks have done quite well in terms of adjusting to fast changes in technology, as they have invested in information technology and built a strong IT infrastructure. They also took over financial technology companies or launched joint ventures with startups, as banks have to fight with new competitors, especially outsiders stepping into their turf of payment businesses.
Recognizing their performance in this area, the central bank recently lifted a limit on technology investment at 3 percent of capital.
Online banking a success
Thai banks have benefited from the central bank launching PromptPay infrastructure, facilitating consumers and businesses to make financial transactions via online banking services such as QR code, and phone number windows.
“Online banking services have yielded huge cost savings for banks, as it is much cheaper to provide online service than meet face-to-face at bank branches,” said Veerathai Santipraphob, former BOT governor. This has enabled them to lower their service fee for customers, he said.
During Veerathai’s tenure, bank customers often complained about bank staff, at their counters, trying hard to sell them unwanted insurance policies. So the central bank had to step in and ask the banks to drop such a sales strategy, according to Veerathai.
Yet, technology also brings cyber-risks. Many credit card and debit cardholders last year experienced online fraud and saw money disappear from their accounts without their approval. In recent years, many customers have expressed disappointment that banks have been slow in compensating them.
With the emergence of digital assets, such as cryptocurrency, several Thai banks have invested in digital asset exchanges, hoping to profit from the popularity of crypto trade among local investors.
But as digital assets are also associated with risks to 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 at not more than 3 percent of capital. Cryptocurrency has been barred from being used as a means of payment for goods and services.
The central bank is also looking to further liberalize the financial market.
The BOT aims to give licenses to virtual banks this year. The virtual bank does not have a physical office, as its operations and services are online. Deploying cutting-edge technology, this kind of bank will employ few staff and they could provide cheaper and faster lending services. Some banks currently have introduced AI to make some lending, as they try to take advantage of new technology and compete with potential new competitors.
How strong are banks?
The S&P Global Ratings lowered the ratings of four Thai commercial banks while maintaining the ratings for the other two banks—Bangkok Bank and Bank of Ayudhya. The rating agency pointed to the buildup of fragility from increasing household debts and the higher number of debtors due to regulatory treatment which enabled Thai banks to provide more financial assistance to debtors compared to other countries.
In addition, the fragile recovery especially in the tourism sector, as well as the potential adverse impact of the Russia-Ukraine tensions, could impact bank loan quality going forward. Nonetheless, S&P noted that the outlook on these banks are stable given that they are well-capitalized with high levels of loan-loss provision.
In response to S&P’s concerns, BOT deputy governor Ronadol Numnonda, who is in charge of financial institutions’ stability, argued that the BOT has implemented several measures to encourage banks to continually assist affected debtors in order to facilitate their post-COVID recovery.
By the end of 2021, the number of debtors under the financial assistance program stood at 14 percent of total loans – a significant reduction from the peak of 30 percent in July 2020 during the surge of the COVID-19 outbreak in Thailand. Since then, it has been evident that debtors who had exited the financial assistance program have regained their debt serviceability.
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 percent and provisioning has increased by Bt430 billion during 2020-21. This reflects banks’ vigilance against the backdrop of heightened uncertainties. Provisioning of Bt890 billion in the banking system is equivalent to 1.6 times of non-performing loans, he said.
Moreover, the BOT has required regular stress tests on banks’ capitals (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 the income and debt serviceability of borrowers as well as the loan quality of banks, added Ronadol.
Starting from April, the BOT has introduced a new benchmark for banks and other types of financial institutions to practice in order to treat clients fairly when it comes to service charges, fees, interest, and fines. Banks are required to disclose this information to clients. Banks have to return the fee charged to ATM card and debit cardholders if customers cancel those cards before their expiration date. Banks are not allowed to collect a fee based on the percentage of loans from borrowers for collateral appraisal services.