One benefit of the 1997 financial crisis in Thailand has been the resulting focus on regulatory reform.If necessity is the mother of invention, it is hardly surprising that Thailand’s bankruptcy proceedings did not take shape until the 1997 crisis engulfed the region’s economies. Six years on, many observers say the creation of a dedicated bankruptcy court underpinned by a comprehensive framework is among the country’s most significant regulatory reforms.
In the freewheeling 1990s, loans were secured using property as collateral, often with little regard for how the money would be spent. Once credit dried up and banks began to call in their loans, many discovered – to their cost – the difficulty of enforcing creditor rights.
Even today, bankers complain about the slow progress of liquidation of assets. A World Bank study estimated that, at the current rate of foreclosure, it would take 10 years for banks to liquidate the $3.7bn of foreclosed assets that sat on their balance sheets at the close of 2002.
Bankruptcy progress
Only the Thai Asset Management Company, created in 2001 to absorb bad loans, mostly from state banks, has extraordinary powers to foreclose on ailing assets. Officials say that it has already done so in many cases. For commercial creditors, it is still a hard slog to chase borrowers through the legal system, although mandatory continuous hearings introduced in 2002 offer some hope of a speedier recovery.
“The bankruptcy court has been a really positive development in Thailand,” says Michael Markels, senior financial sector specialist at the World Bank. “The courts are operating now with a sound framework but it’s a living infrastructure that needs to be enhanced and improved.”
The need for improvement is certainly on the minds of many bankers involved in the $2.8bn Thai Petrochemical Industries (TPI) debt restructuring – one of Thailand’s biggest and by far its most controversial. After months of uncertainty about the future of the company, in which creditors hold a 75% stake after a debt-to-equity swap, a judge ruled in June that the finance ministry should intervene to steer the company. For many creditors, this marked a setback to their right to appoint a management team to enforce an agreed debt work-out plan. They had earlier resisted a suggestion by the prime minister Thaksin Shinawatra that a joint committee of creditors and TPI’s founder, Prachai Leophairatana (who has been at loggerheads with lenders for years), could take charge. Some argue that the legal process has been muddied by state intervention.
Yet, as creditors pick over the bones of the court ruling, most appear ready to accept the new management team – former managers of Thai state companies – and are hopeful that the company can begin to repay its debt again.
“TPI is quite a unique case when you consider the size of the company and its position in the Thai economy,” says Chartsiri Sophonpanich, president of Bangkok Bank. “I think when we look back six to 12 months from now, I believe the [court rulings] will be beneficial to all parties and will bring better recovery than otherwise we would have seen.”
Bankers say that TPI’s rancorous handling in the courts is not typical of most Thai debt work-outs, although it has drawn attention to weaknesses in the legal system. They point to several other successful court-administered restructurings and a slate of new reforms on the agenda at the justice ministry.
Corporate governance
If TPI has raised doubts about legal certainty for financiers, it has also highlighted the spotty record of corporate governance in Thailand, at least before the crisis. Bankers say that this is one area where significant progress has been made, with initiatives in both the public and private sector starting to bear fruit in the past few years.
Thailand’s Institute of Directors has taken a lead in training several hundred directors in their fiduciary responsibilities and rewarding companies that heed international best practices. Observers say that, in the past, bank directors were too busy marketing their services to play a serious role in setting risk appetite and overseeing operations. Now bankers say they are conscious of the need to bring the whole organisation into line and try to avoid a repeat of past mistakes.
“Thailand has been late in focusing on this issue,” says Jada Wattanasiritham, president of Siam Commercial Bank. “Corporate governance is a philosophy that has to be embedded in every part of the bank. It’s not sufficient just to talk at board level.”
The Stock Exchange Commission, which regulates capital markets in Thailand, has also been active in tightening up rules on corporate governance and transparency. Analysts say that most companies have been quick to follow this lead. At the same time, the Bank of Thailand (BoT) has strengthened the role of independent directors in the commercial sector and issued a comprehensive handbook for bank directors.
While banking practices have been substantially revised in the past six years, along with stricter reporting procedures, Thailand’s new banking law is in limbo. Drafted by the BoT, under the previous government, the law ran into trouble in the Senate when a clause capping the interest-rate spread was inserted, to the dismay of central bankers.
BoT deputy governor Thirachai Phuvanat-Naranubala says the government must resubmit the banking bill to parliament before the offending clause can be changed. The rest of the bill, which went unchallenged, contains important measures to address the requirements set out in Basel II and would also give banks more room to expand.
“It would allow banks to do more businesses, particularly in derivatives, and allow more linkages with security companies, for example. It also gives the Bank of Thailand more power to regulate the banks and make them meet requirements of the new Basel capital rules,” says Mr Phuvanat-Naranubala.
Shaky guarantees
The other main regulatory issue facing bankers is the question of how Thailand will reform the blanket guarantee on deposits introduced during the crisis. Mr Phuvanat-Naranubala says the central bank would like to phase in a deposit insurance scheme to replace the current system but that a final decision depends on finance ministry approval.
Bankers say that any move to undo the current guarantee, to which depositors have grown accustomed, must be careful and considered. “We should wait until the public is more confident that the recovery is sustainable and that banks have provisioned against non-performing loans and strengthened their capital base,” says Twatchai Yongkittikul, secretary general of the Thai Bankers Association.
