FeelThailand

The Organized Financial Market

Thailand has a substantial number of financial institutions, namely, commercial banks, finance companies, agricultural cooperatives, savings cooperatives, life insurance companies, pawnshops and credit fonciers. In addition, there are a number of specialized financial institutions, namely, the Government Savings Bank, the Bank of Agriculture and Agricultural Cooperatives (BAAC), the Industrial Finance Corporation of Thailand (IFCT), the Government Housing Bank, and the Export Import Bank of Thailand (EXIMBANK).

Within the organized financial markets, commercial banking is the most important institution in the Thai economy; it will likely maintain this position in the future.

With regard to the outstanding amounts of credit extended by the various institutions, commercial banks also pay the leading and most active role, accounting for 72 percent in 1992. Finance companies accounted for about 18 percent and the remaining 10 percent was shared by other institutions.

The Bank of Thailand

The Bank of Thailand was established in 1942 to act as the country’s central bank. Its function is to issue notes, act as banker to the government and other banks, act as fiscal agent of the government in its dealing with international monetary organizations, manage public debt, maintain exchange controls, supervise commercial banks and manage public credit fonciers.

As banker to the government, the Bank of Thailand holds the main accounts of the Government as well as those of government enterprises. It extends loans to the Government through the purchase of treasury bills and government bonds, and advises it regarding the formulation and implementation of monetary policy. The Bank of Thailand has three branches in the provinces-a southern branch at Songkhla, a north-eastern branch at Khon Kaen, and a northern branch at Lampang.

Under the Commercial Banking Act of 1962 and its revision of 1979, the Bank of Thailand is entrusted with supervising the commercial banks and has the power to prescribe the cash reserve ratio, the maximum rates for loans and deposits, and the ratio of capital funds to risk assets. The Bank also acts as a lender of last resort for commercial banks by giving short-term loans against government securities and making available rediscount facilities. In 1979, a repurchase market was established whereby the Bank of Thailand bought and sold government bonds with an agreement to repurchase or resell. It is considered one of the best central banks in Asia.

As of 1993, there were 15 local commercial banks with 2,700 branches, including head offices: 757 in Bangkok and 1,943 in the provinces. In addition, there were 39 overseas branches of Thai banks, and 14 foreign banks(with 2 branches) registered abroad but operating in Thailand. The commercial banking network reaches practically every town in the country.

The commercial banks in Thailand had total assets of 2,756.9 billion baht of which more than 79 percent was in the form of bill, loans, and overdrafts. Commercial bank lendings are concentrated to a large extent on manufacturing(24.3 percent), wholesale and retail trade(17.9 percent) mostly in the form of working capital financing, and imports and exports(11 percent).

The commercail banks normally provide credit in the form of overdrafts which are on a short-term basis but may be rolled over on a year-to-year basis. Due to fluctations in internet rates both in the international and domestic markets, commercial banks at present encourage customers to utilize term loans instead of overdrafts. Moreover, many commercial banks also provide guarantees for foreign and domestic loans, most of which are in the form of short and medium-term for local companies purchasing machinery and equipment from overseas manufactures.

To further improve the role of commercial banks, the Commercial Banking Act of 1979 stipulated requirements for reducing the banks involvement in non-banking activities, encouraging lending to selected sectors and promoting a better relationship between the banks and their clients.

To promote Thailand as a regional financial centre, the Bank of Thailand implemented foreign exchange liberalization and in 1993 authorized 46 commercial banks to operate International Banking Facilities by providing loans in foreign currency to foreign and local borrowers. Of these, 20 banks were newly-established foreign banks in Thailand.

Other Sources of Finance

Finance companies cannot take deposits, but they can raise funds by issuing promissory notes or similar instruments; these, in turn, are lent to business and individuals. Finance companies came into existence in 1969 and have grown rapidly, reaching a total of 91 as of December 1993. Of these, 20 companies are licensed to offer only finance services, 71 to provide both finance and securities services, and 13 to offer only securities services and 17 credit fonciers companies. Finance companies are not subject to the same interest rate restrictions as commercial banks on their promissory notes, but are subject to the same restrictions on lending rates.

Many finance companies also perform the functions of investment banks by underwriting and marketing the securities of private sector companies. While some of the larger, finance companies have been moving towards term lending, the bulk of their assets are still concentrated on short-term consumer financing and cheque discounting services. With the passing of the Finance Business, Securities and Credit Fonciers Business Act of 1979 and its revision of 1983, all finance companies are to be authorized and regulated by the Ministry of Finance and the Bank of Thailand.

Agricultural cooperatives are organized by farmers for concerted efforts in agricultural activities including the provision of credit to members, while savings cooperatives are formed on an occupational basis with most of the members being salary earners. The agricultural cooperatives obtain most of their funds from the BAAC and lend them directly to member farmers. The savings cooperatives, on the other hand, obtain their loanable funds through a payroll withholding system. The loans given by the savings cooperatives are mostly for meeting current needs, or unexpected expenses or for financing the purchase of consumer goods.

There are at present 12 life insurance companies in Bangkok with branches throughout the country. Of the different types of life insurance, endownment is the most popular, accounting for about 80 percent of all policies sold. The Life Insurance Act (1958) requires each company to maintain security deposits of two million baht and capital funds fo five million baht. It also specifies the various forms of investment into which life insurance companies may put their funds.

Credit fonciers finance the purchase of land or housing construction. They may not mobilize funds from the general public but must rely on their own resources or borrowings. There are at present 17 such companies, most of them operating in Bangkok.

The Government Savings Bank is the only wholly goverment-owned savings bank in the country. With 528 branches at the end of 1993, it has been very successful in mobilizing household savings and invests over 90 percent of its deposits in government bonds.

The Industrail Finance Corporation of Thailand (IFCT) was established in 1959. Functioning along the lines of a private development institution, it is the only industrial development bank in Thailand. Its sources of funds at present are borrowings from several institutions, namely, the Thai government, the Bank of Thailand, the Kreditanstalt fur Wiederaufban and the Japan Export-Import Bank. During the past few years, it has borrowed from the international market. Its capital, retained earnings, and debenture issues also provide loanable funds.

The IFCT makes term loans for financing fixed assets and permanent working capital. Loans are repayable up to 15 years but the average maturity is seven to eight years, including a grace period of two of three years. In addition to lending activities, it also provides specialized services to industries and has introduced securities underwriting services.

The Small Industries Finance Office (SIFO) was established in 1964 as an office in the Industrial Promotion Department of the Ministry of Industry. Its principal objective is to provide financial assistance to small industrial enterprises including cottage and handicraft industries. The SIFO’ s source of funds is limited to government budget appropriations. These funds are deposited with a government-owned bank, which supplements them at a ratio of three to one. Medium and long-term loans of up to one million baht are made at low interest rates. Approval of loan applications is given by SIFO, but collateral evaluation and lending operations are undertaken by the government bank. In 1993, the operations of SIFO were taken over by the Small Industry Finance Corporation (SIFC), with increased loan ceiling up to five million baht per borrower. The sources of funding are from the Thai Government and financial institutions.

The Government Housing Bank, established in 1953, is entirely owned by the government. Its basic function is to provide financing facilities to low-income families to obtain houses of their own. Its sources of funds are borrowings from the government, the Government Savings Bank, the commercial banks, its own capital and retained earnings, and limited savings deposits from the public.

The Export Import Bank of Thailand was established in 1994. Its basic function is to provide medium-term credit for agricultural export, long-term credit for capital goods export, export insurance service, investment guarantee for overseas investment of Thai investors and financing small and new exporters without access to commercial bank lending. The bank also finances import of machinery and equipment used for export production and import of goods beneficial to environment. Its source of funding is from the Bank of Thailand and financial institutions, local and overseas.

The Capital Market

The Securities Exchange of Thailand (SET) was established in 1974 under the supervision of the Ministry of Finance and the Bank of Thailand. In 1993, there were 347 companies listed on the SET. Its trading volume expanded rapidly in the early period of its establishment, and, recently it has become popular with offshore investors. Capital gain tax is not levied on profit on sale of listed securities on the SET. Dividends received from listed companies also receive favourable treatment.

To closely monitor and supervise the operations of SET, the Office of SET, the Office of the Securities and Exchange Commission (SEC) was established in 1992. In the same year, to give new dimension to the capital market, seven mutual fund management companies were licensed to give the general public a chance to participate in the investment through Unit Trusts.