BoT allays NPL worries:

Capital buffer can tolerate bad loans

The banking industry’s bad loans are seen climbing higher for the remaining period of the year, but the central bank is giving assurances that commercial banks’ capital buffer is strong enough to tolerate rising non-performing loans (NPLs) if the economy shrinks 8.1% this year.

“Despite signs of rising NPLs from March, it will not affect financial stability, thanks to the strong buffer of the banking industry,” said Don Nakornthab, senior director for the economic and policy department.

Commercial banks’ capital adequacy ratio (CAR) stood at 18.7% of riskweighted assets at the end of March.

Although the economy this year is expected to sink by 8.1%, which is deeper than the 7.6% contraction of the 1997 financial crisis, financial stability is far stronger than in past crises.

With the solid capital base, banks do not need to recapitalise, Mr Don said, adding that the central bank’s debt relief measures also help financial institutions to keep a lid on bad debts.

He said the central bank has closely monitored unemployment, which is a key vulnerable area hurting economic momentum.

Jobless workers under the Social Security Fund numbered 330,000 in May, of whom 110,000 were redundant. There was no data available for the jobless outside the SSF system.

The labour market was more vulnerable in May, as reflected by the continued acceleration of the number of jobless claims in the SSF system. Lay-off claims accounted for 22% of total jobless claims.

Mr Don said the central bank agrees with the government’s priority of using the economic rehabilitation budget worth 400 billion baht to tackle unemployment.

“Jobless numbers are expected to increase in the second quarter, but it would gradually improve in the third and the fourth quarters in line with the picking up economy,” he said.

The economy saw light at the end of the tunnel in May, but officials still need to wait for the actual data reading in June to confirm that the economy is bottoming out, Mr Don said.

State expenditure is a key engine supporting the Thai economy.

Despite the pickup signs in May, the economy continued to see a contraction due to the ebbing external demand in both tourism and merchandise exports.

Tourism in May was still mired in contraction due to lingering international travel restrictions, while exports slumped from weakening demand in trade partners.

Public spending in the same month continued to expand from the same period last year, reflecting the role of the government to support the economy when other economic drivers were muted.

Nevertheless, public spending, excluding transfers, was flat due to the contraction in current expenditure and state enterprise’s capital expenditure after highly expanding in March and April, though capital spending by the government continued to expand.

In May, private consumption in all spending categories continued to contract significantly from a year earlier, due to the weakening of supporting factors such as employment, income and consumer confidence.