THAILAND'S NON-PERFORMING LOANS
Cynthia M. Pornavalai
is probably no need to remind anyone of that bleak day in July 1997 when
the Thai Baht finally succumbed to the pressure and collapsed. That incident
triggered off the domino-like fall of a then over-leveraged Thai financial
system, and exposed basic structural defects in corporate Thailand. Corporate
Thailand was then, as it is now, largely dependent on banks and a number
of financial institutions for financing. A chicken-and-egg situation ensued
whereby the companies weighed by heavy-debt burden, courtesy of wayward
lending and borrowing practices of the 90s, started to collapse one by
one on the one hand, and the banks collapsing over the unabated weight
of Non-performing loans or NPLs, on the other hand.
as of July 2001 total Baht 615.06 billion representing 12.69% of total
loans in the system. Private banks account for Baht 476.86 billion or
17.95% of total loans, while state banks account for Baht 92.53 billion
or 6.39% of total loans. NPLs of foreign banks and finance companies totaled
3.55% or Baht 20.81 billion and 15.98% or Baht 24.86 billion, respectively.
Thai government was aware that something had to be done to address the
paralyzing effect of the heavy NPL situation on the Thai economy. In 1998,
the Amendment to Thai Bankruptcy Act which had been in the shelves for
more than a decade at that time, was resurrected and finally given life.
For the first time in Thailand, a legal regime for court-controlled corporate
debt restructuring was set in place. At about the same time the Bank of
Thailand (BOT), together with the Thai and Foreign Bankers' Associations
and the Board of Trade initiated an out-of-court debt restructuring guidelines
modeled after the London approach and the HKMA Guidelines. A year later,
in 1999, another Amendment to the Bankruptcy Act was enacted to refine
the 1998 Amendments. The BOT, together with local financial institutions
also took further initiatives in encouraging corporate debt restructuring
by formulating a binding framework in the form of Debtor-Creditor and
Inter-Creditor Agreements. The BOT's CDRAC or Corporate Debt Restructuring
Advisory Committee coordinated the restructuring efforts under the DCA
and the ICA by identifying the debtor and creditor groups and setting
up the venue for the dialog and negotiations between these two groups.
at the end of September 2001, a total of 989 bankruptcy and business rehabilitation
cases involving a total debt amount of Baht 200.95 billion have been filed
with the Central Bankruptcy Court, compared to 986 cases involving Baht
58.2 billion for the whole of year 2000. CDRAC, on the other hand has
helped restructure 439,276 cases since its inception 2 years ago, involving
debts totaling Baht 2.3 trillion.
the figures can be impressive, the restructuring process that ensued under
the Amended Bankruptcy Act and the CDRAC framework was painstaking. After
some time it became obvious that the effort in abating the NPLs was like
a Russian dance: two steps forward, and one step back. The millennium
buzzword "restructuring", people started to realize, is actually
debt rescheduling. The banks simply managed to defer the NPL problem on
the hopes of economic recovery. With such economic recovery unfortunately
not forthcoming as expected, the restructured NPLs relapsed. [For
example, in July 2001, new NPLs totaled Baht 16 billion, while restructured
loans turning bad again totaled Baht 23.6 billion]. More worrying,
however, is that new breed of species, the "strategic NPLs",
spreading fast like virus.
as Thailand's last chance to clean up its NPL mess, the Emergency Decree
on Thai Asset Management Corporation, or TAMC Decree came into force on
June 9, 2001. With all the good intentions but crippled with hastily drafted
and obscure provisions, the TAMC Act has been riddled with criticisms
and even a legal suit on its constitutionality. Finally clearing its constitutional
hurdles on October --, 2001, the TAMC started accepting its first lot
of asset transfer last October 15, 2001.
what is a TAMC and what is it empowered under the Act?
for establishing TAMC
rational for establishing a national asset management corporation is in
order for the government to address the high level of NPLs in both state-controlled
and private financial institutions and to set the environment right for
the banks to recommence lending.
TAMC is a government agency owned 100% by the Financial Institutions Development
Fund (FIDF). TAMC will issue Baht 170 billion (approximately US$ 3.7 billion)
10-year notes guaranteed by the FIDF to financial institutions as payment
for TAMC's purchase of NPL assets form these financial institutions. The
TAMC is managed by a Board of Directors consisting of no more than 11
members appointed by the Minister of Finance and approved by the Council
the TAMC is tasked with the acceptance of transfer of sub-quality asset
and its management. Towards the realization of such objectives, TAMC has
unprecedented encompassing powers, such as establishing of limited companies,
guaranteeing credit for debtors, and lending money to debtors.
Transfer of Assets
NPLs that can be transferred
state-owned financial institutions and asset management companies are
required to transfer all NPLs falling under the following categories as
at December 31, 2000:
(required to be written off);
of loss" (requiring 100% provisioning);
(requiring 50% provisioning); and
(requiring 20% provisioning)
financial institutions and asset management companies may transfer NPLs
to TAMC only under the following circumstances:
||the NPLs are
secured by property;
||the debtor which
is a juristic entity is indebted to at least 2 Thai financial institutions;
||the total value
of NPL owed by a debtor is at least Baht 5 million; and
resturcuturing agreement in writing has been entered for the NPL
by July 9, 2001, and the NPL is not part of a rehabilitation plan
approved by the Bankrupcty Court before June 9, 2001.
creditors, non-Thai banks and their branches are not eligible to transfer
their NPLs to the TAMC.
price of the assets payable by TAMC to the State Banks is the value of
the collateral excluding personal guarantees. The rules prescribed by
the TAMC Board shall determine the price to be paid if there is no collateral.
price payable to private banks that opt to transfer NPLs to TAMC is (a)
the value of the collateral (excluding personal guarantees), or (b) the
book value of NPL less applicable reserve amount, whichever is lesser.
Book value here means the total principal amount of the loan as at the
date of transfer together with accrued interest for the 3-month period
prior to the transfer date.
the collateral is land, its value is deemed to be the assessment price
used by the Land Department in the calculation of land transfer fees.
c. Profit and
Profit and loss will
be shared as follows:
||first 20% -
shared equally between TAMC and the financial institution;
profit not exceeding the difference between the book value and transfer
price will accrue to the financial institutions;
profits will accrue to TAMC.
||first 20% of
transfer price - absorbed solely by financial institutions;
||second 20% -
equally shared by TAMC and financial institution;
absorbed by TAMC.
2. Debt Restructuring
of the most interesting powers of the TAMC is its ability to restructure
the debt by unilaterally amending loan terms, forcing a debt-equity conversion
(despite the absence of similar mechanism under present laws), taking
assignments of debts or assets from the debtor to settle debts, and taking
transfer of shares or buy issued shares to increase the debtor's capital.
For all these and other measures, only the approval of the TAMC Board
is required. Certain procedures required under relevant laws are generally
TAMC Decree sets forth the rules and procedures of business reorganization
separate from those provided under the Bankruptcy Act. The criteria for
business reorganization under the TAMC Decree are as follows:
debtor must be a limited company, a public limited company or a
||TAMC is a creditor
and is owed more than 50% of the debtor's total debt;
is evidence that the business can be carried on and its rehabilitation
will benefit the national economy;
debtor consents and agrees to be bound by the terms and conditions
of business reorganization under the TAMC Decree.
TAMC Executive Committee appoints the planner who is tasked to draft the
plan within the time limit set by TAMC. Once the Executive Committee and
the TAMC Board approves the plan, the TAMC shall file a petition with
the Bankruptcy Court for it to consider the plan. From the date of court
approval of the plan to the completion of business reorganization, the
automatic stay similar to that under the Bankruptcy Act is applied.
plan may a require merger of debtor's businesses, closure of part of the
business, payment of other creditors participating in the business reorganization,
and other measures approved by TAMC Board. In these circumstances, certain
provisions under Civil and Commercial Code (CCC) and the Public Company
Limited Act are waived.
first batch of NPLs transferred to TAMC on October 15, consists of debtors
with one creditor and debts of over Baht 50 million. There are about 1,100
debtors in this category with debts totaling Baht 300 million. The second
batch of NPLs worth about Baht 400 billion will be transferred at the
end of October 2001. This category consists of debtors with 2 creditors,
mostly, state and private financial institutions. The third batch of loans
which will be transferred in November, will involve the remaining 4,000-6,000
debtors with two or more creditors and total debts of about Baht 220 billion.
It is expected that approximately 77% of the total NPLs in the banking
system will be removed once these three batches have been completely transferred.
as these figures might appear, there seems to be little enthusiasm today
towards the TAMC. [As at early October 2001, twelve
financial institutions with a total of Baht 38.8 billion in NPLs declined
to participate in the TAMC program.] Bankers do not think of it
as a panacea to the NPL problem. An academic fears that the TAMC will
be a vehicle to "warehouse" the NPLs forever, and see its value
as limited only to the state banks which must get the NPLs off their books.
is unfortunate that the inherent problems which make NPLs thrive, remain,
i.e., Thailand's weak foreclosure and bankruptcy laws, limited security/collateral
laws, weak corporate governance standards, deteriorating credit culture,
and weak prospects for early economic recovery. Injecting more capital
into the system, obviously, is not the answer. Thai banks are sitting
on large surplus liquidity, but they have also learned their lessons.