BOT chief says pru­dence in lend­ing is es­sen­tial

The Myanmar Times - Weekend - - International Business -

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 debt­ser­vic­ing 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 0.50-0.75pc.

High for­eign re­serves, a low share of for­eign­ers in Thai bonds at a mere 14pc 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 in­for­ma­tion-based 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 far-fetched,” 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 third­party 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. – Bangkok Post

Fed says growth still mod­est, op­ti­mism wanes

Most Fed­eral Re­serve dis­tricts re­ported mod­est or mod­er­ate eco­nomic growth in re­cent weeks, though four re­gions said growth had slowed or was “slight,” a sur­vey from the US cen­tral bank showed.

“Most Dis­tricts re­ported that firms re­mained pos­i­tive; how­ever, op­ti­mism has waned in some as con­tacts cited in­creased un­cer­tainty from im­pacts of tar­iffs, ris­ing in­ter­est rates, and la­bor mar­ket con­straints,” ac­cord­ing to the re­port, re­leased Wed­nes­day in Wash­ing­ton.

The cen­tral bank’s Beige Book eco­nomic re­port, based on anec­do­tal in­for­ma­tion col­lected by the 12 re­gional Fed banks through Nov. 26, said la­bor mar­kets fur­ther tight­ened. “Over half of the Dis­tricts cited firms for which em­ploy­ment, pro­duc­tion, and some­times ca­pac­ity ex­pan­sion had been con­strained by an in­abil­ity to at­tract and re­tain qual­i­fied work­ers,” the re­port said.

“Partly as a con­se­quence of la­bor short­ages, most Dis­tricts re­ported that em­ploy­ment growth leaned to the slower side of a mod­est to mod­er­ate pace,” the re­port said. “Con­versely, most Dis­tricts re­ported that wage growth tended to the higher side of a mod­est to mod­er­ate pace.”

Pre­pared by the Philadel­phia Fed, the re­port will be re­viewed by pol­i­cy­mak­ers as they pre­pare for their Dec. 18-19 meet­ing when they are ex­pected to raise in­ter­est rates by a quar­ter per­cent­age point for the fourth time this year. – Bloomberg

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