SME Bank challenge
Making Sense: SME Bank should close its doors if it can’t address poor performance, allegations of fraud and mismanagement.
Iwonder who is in greater need — Thai small businesses or the state bank set up to help them? The SME Bank was established in 2002 with the mandate of providing loans, guarantees, venture capital and advice to small- and medium-sized (SME) businesses.
But given the bank’s poor performance, allegations of fraud and mismanagement, it seems that it is in dire need of assistance itself before it can begin to help others.
The bank board recently agreed to pursue criminal charges against former staff and other people who are responsible for the poor state of its balance sheet, which includes non-performing loans amounting to as much as 32% of total outstanding loans.
The particulars of this case involve a decision by bank executives to accept deposits from the Office of the Rubber Replanting Aid Fund with abnormally high interest rates.
This in itself is not unusual — banks will often quote preferential rates for large customers.
But the rubber fund supposedly agreed to deposit 6-7 billion baht in funds, but ultimately deposited only 2 billion.
More onerously, the SME Bank paid interest for the deposits in the form of two cheques, one directly to the Rubber Replanting Aid Fund.
A second cheque, for 1.68 million baht, was also written out to the fund but was left ‘‘open’’, with no stipulation of ‘‘account payee only’’.
It appears that the cheque was cashed not by the Rubber Replanting Aid Fund, but by a third party.
The board also ordered action in another case of purported fraud, involving loans offered to a company related to a former audit committee director of the SME Bank itself. These loans are currently in default and amount to around 130 million baht.
The Bank of Thailand, which does not directly regulate the SME Bank but has examined its operations with the support of the Finance Ministry, has pointed to numerous problems within the bank, including the need to improve credit approval procedures.
Bank management has the authority to approve up to 5 million baht each time without board approval. Regulators note that some loans appear to have been intentionally structured as separate loans, each under the 5-million-baht limit, to avoid the need for board review.
The central bank in past examinations has made even more damning com-
It seems [the SME Bank] is in dire need of assistance itself before it can begin to help others.
ments, including suspicions of accounting fraud and understating the bank’s actual level of non-performing loans.
Not all is necessarily lost. Pichai Chunhavajira, the SME Bank executive chairman, has plenty of experience, given his long tenure as former chief financial officer at PTT and president of PTT Oil.
But it is hard to imagine any lasting turnaround for the SME Bank so long as lending decisions and operations are more tied to political affiliations and relationships than straightforward commercial considerations.
Executive appointments unfortunately seem to be more related to connections rather than pure ability, although this is a problem hardly unique among civil service agencies and state enterprises.
Yet losses at the SME Bank ultimately become everyone’s, either directly in the form of taxpayer funds or indirectly through lost opportunities for Thai small businesses and the overall economy.
Small businesses account for as much as 95% of all businesses in Thailand and employ over half of the labour force. Any aspirations to lift the Thai economy to break out of the middle-income trap and move up the development ladder will hinge on the country’s small businesses, and their ability to foster innovation, explore new market segments, enhance value and ultimately grow to become large companies.
Since 2004, the Finance Ministry has increased capital by over 9 billion baht in the SME Bank, on six occasions, in an effort to clean up its portfolio and enhance its ability to execute its mission. Alas, the organisation ranks among the three worst state enterprises in the country, after the State Railway of Thailand and the Bangkok Mass Transit Authority.
I think if at the end of the day, the long-standing problems at the SME Bank cannot be addressed, it may be best to simply close the institution altogether.
Some small companies may find it difficult to gain access to credit if the SME Bank is closed. But if these firms are so uncreditworthy that the country’s leading commercial banks refuse to lend to them, is it really wise that the government — and taxpayers — take up the burden?
Legitimate companies with potential can always turn to the Thai Credit Guarantee Corp, a state agency set up with the purpose of helping small businesses gain access to credit. As it stands, it appears that all too often the SME Bank is simply used as a conduit to channel funds to a privileged few at the expense of all.