History of Thailand banking sector. In 1865, The Hong Kong and Shanghai Banking Corporation set up its branch in Thailand, which is the first banking institution to be founded in Thailand. A lot of European banks set up their branch offices in Thailand which made foreign to be dominant in the banking industry of Thailand. Siam Commercial Bank was the first local bank to be founded in 1906. Since 1950s after the World War Two, in order to protect the local banking sectors, the government made use of the protective measure by limiting the presence of foreign banks to one branch office.
Thailand's up-to-dated banking system is composed of the Central Bank, which is Bank of Thailand, (local and foreign) commercial banks, special purposes banks, and Government Savings Banks.
Bank of Thailand
The Bank of Thailand (BOT), the central bank of the country which headquarter is in Bangkok, was set up in accordance to regulations imposed by the Bank of Thailand Act in 1942.
The main functions of BOT are regarded as managing banking facilities, supervising foreign exchange control, as well as monitoring the region-wide economic situations. It also has representative offices in London and New York.
The current governor of the Bank of Thailand is Mr.Prasarn Trairatvorakul (1 Oct. 2010 - Present)
The Roles and Responsibilities of BOT are as follows:
Print and issue the Thai banknotes
Manage the central bank's assets
Provide loans to the local government and financial institutions and act as registrar for government bonds
Supervise and regulate financial institutions
Manage foreign exchange rate and foreign reserve assets in accordance to the Currency Act
Control foreign exchange with the Exchange Control Act
Promote monetary stability and formulate monetary policies
Closer Look to Monetary Policies of BOT:
The Bank of Thailand's Monetary Policy Committee (MPC) meets to determine the 14-day repurchase rate and its target variables. Instead of money supply, BOT has targeted inflation since May 2000, as the focus point of its monetary policy. Its missions are to ensure price stability by using inflation targeting as tool to maintain inflation rate between 0-3.5% every year. The repurchase rate gives an indicative signal to what level of short term interest rates should be set up the financial institutions. This in turn affects the consumption and saving patterns of corporates and consumers, which affects the pace of economic growth.
Commercial Bank
Thai commercial banks are made up of branches and representative offices of foreign banks. They function according to the Thai laws and regulations set up by the Ministry of Finance (MOF) and the Bank of Thailand (BOI.). Thai commercial banks provide services of time savings and demand deposits, loan making by discounted bills, overdrafts and hire purchases. Services like syndication of loans, custodian services, merger and acquisition, project feasibility studies etc help them generate fee incomes. They also engage in the issuance of negotiable certificates of deposit and underwriting services of debt instruments.
In Thailand, commercial banks are the biggest financial institutions. In 2007, there are 13 local commercial banks and 15 foreign banks with branch offices in the country.
Sustained Market Share of Local Commercial Banks:
The leading bank of Thailand, for instance, is one of the top commercial banks in Southeast Asia. Thai banks are prominent in term of its local standard but comparatively small to the Europe, U.S and Japan banks.
There are uneven distribution of market share of the local banks in Thailand. In June 1993, the top three Thai commercial banks controlled over 50% of the domestic market. They took about 55% of the deposits and assets of local banks with large branches networks of over 400 for each bank.
Majority of local banks are profitable regardless of its size. In 1992, the average local commercial bank's net profits were up to USD $50 million per year. The income sources mainly generated from the spread rate between lending and borrowing activities. The spreads has remained high for around 5% with government protection to the local banking sector.
Changing Roles of Local Commercial Banks:
With the increasing competition between local commercial banks and other local and foreign financial institutions, Thai commercial banks have undergone changes in their focus of core businesses from interest income-based to fee-based services. Commercial banks are mainly engaged in issuing, underwriting and trading debt instruments, as well as offering advisory and consultancy services. Since 1992, banks have developing their private-, merchant- and investment-banking divisions.
Operations are also required to fit with international standard. Banks have carried out international capital guidelines for accounting set by the Bank of International Settlements since 1993. The Bank of Thailand required commercial banks to release criteria for setting up of loan and deposit rates.
Local banks alone, however, are in scale too small to support the economic growth of Thailand. Large-scale projects of capital-intensive industries need global financing by syndicated loans.
Foreign Banks:
According to the Commercial Bank Act, an application for corporation of local commercial banks must be filed with the Ministry of Finance to form as commercial banks in Thailand. A commercial bank is operated as limited public company upon having been approved and licensed.
However, to open a branch in Thailand, a foreign bank has to comply with rules and regulations set up by the Thai government. For instance, money should to be brought from its overseas head office. Thailand government allows foreign banks to acquire shareholding of 100% for a maximum of 10 years. If they hold over 49% of shares sold, they are not allowed to acquire additional shares.
Special Purpose Bank
Special-purpose banks are state-owned companies to finance activities of particular economic sectors. Their activities are supervised and administered by the Thailand government. They lend out loans at preferential interest rates to specific clients for particular projects. Examples of special purpose banks are the Government Savings Bank, the Bank for Agriculture and Agricultural Cooperatives, and the Government Housing- Bank.
Government Savings Bank
The Government Savings Bank was first set up in 1913 when King Rama VI set up the Savings Office. The Savings office was later transformed into the Post & Telegraph Department. Its assets and liabilities were eventually taken over in 1947 by the newly formed Government Savings Bank.
The Government Savings Bank has widespread network of offices in the country. It is mainly engaged in collecting savings of small amounts by demand, savings, and time deposits and premium savings bonds. In Bangkok, for instance, it has been running door-to-door floating services 6 days per week for over 30 years. Customers inform the floating bank to stop at their living places by putting a small flag outside homes to indicate needs for deposit or withdrawal transactions.
Savings from small depositors are main source of funding for financing infrastructure projects of governments. Until recently, it invested money in government bonds and securities as well as promissory notes. It also increases use of funds in loan lending to enterprises and individuals of private sectors.
Financial Sector Master Plan
Background
The Asian Financial Crisis in 1998 showed that high level of non-performing loans was its main course of speculative attack on Thai currency, baht. By 2003, those bad loans have been cut by half to around 30%.
The Ministry of Finance and the Bank of Thailand formulated the Financial Sector Master Plan in 2 phases for financial institutions to guide the sustainable long term development of the banking and financial sector. Phase 1 was carried out from 2004-2008, while Phase 2 is to be carried out from 2010-2014.
Financial Sector Master Plan
Measures to broaden general access to financial services
1.1
Transforming the Bank of Agriculture and Agricultural Cooperatives (BAAC) into a rural development banks.
1.2
Encouraging existing financial institutions to increase the level of financial services available to low-income households.
2.
Measures to increase efficiency of the financial sector
2.1
Restructuring Thai financial institutions by issuing only two types of licenses to financial institutions that accept deposits from the public:
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Full-service commercial banks, which will be allowed to open branches with no limit on number or location, but must merge with at least one other finance or credit foncier company. The other type will not be allowed to open branches.
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Retail banks, which may offer financial services to retail customers and SMEs, subject to per customer exposure limits and other conditions set by the BoT.
2.2
Restructuring foreign-owned financial institutions to enable them to play a greater role. There will be two types of foreign bank licenses:
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Subsidiaries of foreign banks, which will be allowed to open a certain number of branches.
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Full branches of foreign banks. Stand-alone BIBFs will be encouraged to upgrade to full branches or subsidiaries. Tax benefits for "out-in" transactions will be discontinued.
The Financial Sector Master Plan has been successful in consolidating the growth of Thai financial sector through supporting foreign-, privately- and state-owned institutions. In 2007, the Thai banking industry is composed of 3 state-owned commercial banks and 5 state-owned specialized banks, 15 Thai commercial banks, and 17 foreign banks.
Future Focus of Banking Reform Program:
Thailand has taken the initiative in undergoing a series of regulatory and legal reform programs in future to deal with contemporary issues which threaten the stability and growth of the banking sector. These reforms are focus on rectifying the problem of depletion of net international reserves, solving systemic problems like liquidity shortage of banks which harms the growth of property market and real estate sector, as well as high levels of non-performing loans which are easily prone to the occurrence of regional economic turmoil.
