BoT chief surveys money landscape
Prudence in lending is essential, he says
The Bank of Thailand has adopted a series of measures over the past few years to block threats to financial stability amid loose monetary policy for an extended period. Governor Veerathai Santiprabhob, however, still sees some areas of concern.
The central bank chief points to a widespread asset-liability mismatch among property developers, ebbing debt-servicing ability among borrowers, and financial institutions’ underpricing of risk when they lend to large companies.
Several listed and non-listed property developers have raised funds by issuing three- and six-month bonds, particularly those that are unrated, to acquire land bank for development in the next five years, Mr Veerathai said during an exclusive interview with Bangkok Post Group.
“Everyone [each investor] is living in the illusion that they would be unscathed as they invest in bonds of only three or six months and they can move quickly, but no one looks deep into these companies’ balance sheets,” he said. “Borrowing for three or six months can backfire if the debt rollovers fail.”
The slow deleveraging of household debt remains a drag on the country’s economy. The central bank lacks sufficient information about debt-to-service ratio (DSR), but it has asked lenders to be more prudent about the issue when they extend loans.
When the unexpected shock crops up, income could be hurt and debt-servicing ability could deteriorate accordingly.
Another issue on which the central bank is keeping a closer watch is banks’ underpricing of risk when they extend loans to large companies, Mr Veerathai said. Although their capital buffers are large enough to prevent the problem from snowballing into systematic risk, the danger is that such activity becomes part of the organisational culture.
“Such practice is undesirable,” he said. “We’ve already warned several banks. Banks must pay more attention to risks when they extend loans to companies, not just focus on loan growth.”
Amid the low-interest-rate environment, large companies have shifted to mobilising funds through the bond market. This gives them higher bargaining power than banks and compels banks to charge a lower rate than the risk would indicate, Mr Veerathai said.
Some large companies recently failed to service their debt, reflecting lax credit standards, he said.
His remarks echoed the Monetary Policy Committee minutes for the Nov 14 meeting, which warned that tightening financial conditions could lead to higher borrowing costs in the bond market and affect debt rollovers, particularly in the case of companies issuing bonds with a low credit rating or unrated bonds, mostly in the real estate sector.
The minutes said the share of new mortgage loans with high loan‐to‐income (LTI) ratios continues to rise, while the DSR of low‐income households remains elevated. Moreover, debt-servicing ability of small and medium‐sized enterprises (SMEs) with rising bad loans must still be monitored, particularly businesses affected by structural changes such as rice mills and wholesale and retail businesses.
Eliminating fragility on the domestic front is the central bank’s crucial task if it wants to prevent hefty capital outflows, Mr Veerathai said, adding that if foreign investors view Thailand as fragile, the baht will no longer be a safe-haven currency.
“Today our external position is sound, so foreigners are willing to park money here despite low return,” he said. “If our country has fragility, that poses vulnerabilities to financial stability, such as financial institution risk. The current atmosphere hasn’t triggered capital outflows, but we can’t be complacent.”
Thailand’s policy interest rate, unconventionally, is now lower than the US Federal Reserve’s benchmark rate of 0.50-0.75%.
High foreign reserves, a low share of foreigners in Thai bonds at a mere 14% and the foreign-denominated debt of the private and public sectors allow a wide gap in the two nations’ rates, Mr Veerathai said.
DISRUPTIVE FORCES
Disruptive innovation has great implications for monetary policy, as it keeps inflation at a low level and nudges local financial institutions towards digital transformation, the central bank chief said.
Technology-related product prices have continuously declined, booming e-commerce has eroded business operators’ purchasing power in setting prices, and automation has been adopted to fend off rising labour costs.
Technology has played a pivotal role in financial institutions, Mr Veerathai said, and the Bank of Thailand has a policy to fully support them in adopting technology and rolling out new and innovative financial products that don’t add to systematic risk.
The Bank of Thailand is revamping a series of regulations to enable informationbased lending, letting financial institutions test out innovative products in the regulatory sandbox, and scrapping unnecessary regulations in a bid to help financial institutions and small businesses cut costs.
Most of the regulations are undergoing amendment. All regulations are expected to be completely rejigged by next March.
Under the plan, the central bank will encourage financial institutions to adopt information-based lending for SMEs by relaxing restrictions on credit lines for operator-owned SMEs, while easing regulations on debt-servicing ability for SMEs by letting lenders use alternative data in addition to income to give SMEs easier access to financial sources.
Lenders typically use a revenue-based lending approach.
Agility in adopting innovation and a focus on retail banking after the 1997 financial crisis are Thai banks’ strong points in preventing disruption by technology platform giants, Mr Veerathai said.
He said banks’ recent self-disruption by waiving transaction fees on the digital channel discouraged technology platform operators from entering banks’ payment-and-transfer turf, as they do not earn income from these segments.
Moreover, creating a single standard such as for quick response (QR) code payments has kept big technology platforms from overshadowing the local banking industry, he said.
DIGITAL CURRENCY
Mr Veerathai said the Bank of Thailand has yet to see an advantage to retail central bank digital currency (CBDC), as it would take a toll on banks’ operations as people shifted deposits to the central bank.
“Our case [for retail CBDC] is still farfetched,” he said. “We’ve paid attention to payment systems such as PromptPay, which is now a solution for people, and it will be extended to companies in the next step.”
Unlike retail CBDB, digital tokens for interbank settlements or wholesale CBDC have a clear benefit, as banks are no longer need to build up huge cash for settlement with others and it’s then easier for them to management cash.
Furthermore, wholesale CBDC works around the clock, seven days a week, while the Bahtnet system — the infrastructure for interbank and third-party fund transfers — has business hours.
Mr Veerathai said a further eight banks have joined Project Inthanon, which is developing a prototype for domestic wholesale funds transfers using wholesale CBDC.
The project is expected to be completely developed by the first quarter of 2019.
‘‘ Today our external position is sound, so foreigners are willing to park money here despite low return.
VEERATHAI SANTIPRABHOB Bank of Thailand governor