Thailand’s Financial and Banking Systems
By Plearnpit Satsanguan
and Sukanda Lewis
Faculty of Economics Thammasat University
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Thailand’s Financial and Banking Systems
1. Introduction
Thailand’s financial system, which is dominated by the banking sector,
remained robust in 2008 despite the economic slowdown due to the global financial
crisis which began in the summer of 2007.
The performances of Thai authorities in managing its money and banking
affairs in 1960s and 1970s were impressive, partly due to successful development and
diversification of its financial institutions. “However, economic imbalances in the
early 1980s and the rising tendency of government intervention put the financial
sector under stress, thus reducing its efficiency in resource mobilization and
allocation (U.S. Library of Congress).” During the 1980s and early 1990s the Thai
financial institutions particularly under the supervision of the Bank of Thailand, the
Central Bank, had been under the process of financial liberalization that includes
deregulation of international capital flows, a movement toward a more flexible
exchange rate system, and financial innovation. In order to reach the ambitious goal
of turning Bangkok to be a regional financial center, the Bangkok International
Banking Facilities, BIBFs, was established in 1993 which eventually led to the East
Asian Financial Crisis in 1997.
The purpose of this paper is to explore the development of Thailand’s
financial and banking systems. The current situations of Thailand’s financial and
banking systems are also discussed. In addition, the paper covers the recent financial
reforms and the weaknesses in the financial sector as well.
This paper is organized as follows. Section 2 describes the overview of Thailand’s
Financial and Banking Sector. Section 3 summarizes the recent financial sector
reform. Section 4 outlines various policy measures toward financial liberalization
between the late 1980s and the early 1990s. Section 5 addresses the current
weaknesses in the Thai Financial Sector.
2. Overview of the Thai Financial System
Thailand’s financial system can be classified into four major constituents,
namely: i) commercial banks; ii) capital markets (including both the stock and bond
markets); iii) government-owned specialized financial institutions (SFIs); and iv) non-
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bank financial intermediaries comprising finance companies, credit foncier
companies, life insurance companies, and various co-operatives (Disyatat and
Nakornthab, 2003: 3).
2.1 Commercial Banks
Table 1, which provides some salient features of these four constituents as of
end-2002 and end-2008, indicates that commercial banks are the oldest financial
institutions and dominate the Thai financial system, accounting for 56 percent of total
financial sector assets (excluding capital markets) at the end of 2008. As of March
2009, there were 14 domestic banks, 16 foreign bank branches, 3 retail banks and one
subsidiary.
Commercial banks in Thailand are allowed to undertake universal banking.
Banks can offer a wide range of financial services in both traditional and investment
banking. Between 2004 and 2008, the local banks were focused primarily on
commercial banking, with interest income accounting for about 80 percent of total
income. Currently, banks turn from traditional corporate banking to retail banking and
SME businesses because they offered better diversification and enhance profit. Facing
with intense competition in the banking sector, “banks implemented competitive
strategy including modernizing their services, expanding their networks, and
differentiating themselves by offering more financial products such as short-term bills
of exchange (B/E), special deposits, and cross-selling of products such as by acting as
broker for life insurance and selling of mutual fund products (Bank of Thailand,
Supervision Report 2007: 13).”
Before the financial crisis in 1997, Thailand’s financial system can be
described as ‘bank-based’, with commercial banks dominating the landscape.
However, after the crisis, the role of the banking sector becomes less prominent, as
shown in Table 2. As of 2008, the banking sector still had the largest share of the
whole financial system. However, the stock market and the bond market have more
important presence.
Changing Financial Landscape
The structure of the Thai financial sector has changed significantly since the
financial crisis. Before the crisis, the financial sector consisted of a large number of
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financial institutions, and was heavily dominated by finance and securities companies.
Of the total 176 financial institutions under the supervision of the Bank of Thailand,
there were 91 finance and securities companies.
Due to closures and mergers of many finance and securities companies after
the crisis, this landscape changed. As of December 31, 2003, there were only 18
finance and securities companies left operating. Figure 1 shows the changing
composition of the financial institutions under the supervision of the Bank of Thailand
from 1997 to 2003 and 2009. Since 2003, the change in financial landscape has
continued.
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Table 1: Major Constituents of Thailand’s Financial System
Constituent First Est.
No. Total assets/values ( Bt b)
Share of Total Financial institution Assets (%)
2002 2008 2002 2008 2002 2008
1. Commercial banks
Domestic banks 1906 13 18 5,780 8,774 59.4 56.2 Foreign bank branch 1888 18 16 686 1,274 7.0 8.2
2. Capital markets
SET market capitalization 1975 N.A. N.A. 1,986 3,568 N.A. N.A. Public bonds Outstanding 1933 N.A. N.A. 1,757 4,002 N.A. N.A. Corporate bonds Outstanding 1992 N.A. N.A. 543 1,002 N.A. N.A. Securities companies 1953 39 43 51 146 0.5 0.9 Mutual fund companies 1975 14 22 467 1,525 4.8 9.8
3. Specialized Financial Institutions (SFIs)
Government Savings Bank 1913 1 1 600 772 1 6.2 4.9
BAAC 1966 1 1 396 631 4.1 4.0
Government Housing Bank 1953 1 1 362 647 2 3.7 4.1
IFCT 3 1959 1 N.A. 210 N.A. 2.2 N.A.
Export-Import Bank 1993 1 1 48 60 0.5 0.4
SME Bank (formerly SIFC) 1992 1 1 13 49 4 0.1 0.3
Secondary Mortgage Corp. 1997 1 1 2 5 5 0.02 0.01
4. Non-bank financial intermediaries
Finance companies 1969 19 4 254 45 2.6 0.3 Credit Foncier companies 1969 6 3 6 1 0.1 0.0 Life insurance companies 1929 26 25 360 818 6 3.7 5.2
Agricultural cooperatives 1916 4,073 4,343 67 96 7 0.7 0.6
Non-agricultural cooperatives 1937 2,333 3,329 437 781 8 4.5 5.0
Source: BOT; DOI; SET; TBDC 1, 2, 5 Statistics at the end of Quarter3/2008
3 IFCT merged with The Thai Military Bank Public Company Ltd. since 1 September 2004.
4, 6, 7’8 Statistics at the end of the year 2007
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Table 2: Shares of the Thai Financial System (%)
1996 2002 2008 Bank Loans 61.05 51.78 41.54
Equities (SET market capitalization)
32.38 22.35 28.19
Domestic Bonds (par value) Source: The Thai Bond Market Association
6.57 25.87 30.27
At present, the landscape is significantly different from the one in the post-
crisis period, as shown in Table 2. We see a significant drop in the number of the
financial institutions under the supervision of the Bank of Thailand from 83 to 42.
This was due to the implementation of structural reforms as outlined in the Financial
Sector Master Plan (FSMP) Phase I, which was implemented in 2004 and was
completed in 2007. One of the three visions of the FSMP-I was to develop
competitive, efficient, stable and balanced financial system. To achieve this vision,
several measures were implemented, for example, the licensing reform and the “One-
presence” policy.
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Figure 1: Structural Changes in Financial Institutions under the Supervision of the Bank of Thailand
Source: Bank of Thailand
According to the Bank of Thailand (BOT)’s Supervision Report 2006, types of
licensing for domestic deposit-taking financial institutions were reduced from six
types- commercial bank, foreign bank branch, International Banking Facilities,
restricted bank, finance company and credit foncier company - to four types -
commercial bank, retail bank, foreign bank branch and subsidiary of a foreign bank.
In addition, the “One-presence” policy requires that individual financial
conglomerates are allowed to have only one deposit-taking financial institution in
their group.
Improved Stability
Since the financial crisis, there has been improvement in the stability of Thai
commercial banks. The ratio of gross non-performing loans (NPLs) to total loans has
been decreasing steadily. As shown in Figure 2, the ratio of gross NPLs to total loans
of commercial banks reached its peak of 50% around the first quarter of 1999, and has
been declining gradually. By the fourth quarter of 2008, they were only around 8% of
total loans. The ratio of NPLs to total loans of foreign banks has been low throughout
the period.
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Source: Bank of Thailand
The increased stability is also reflected in the capital adequacy ratio (CAR),
which is the ratio of bank’s capital to risk-weighted assets. It measures how well
banks can absorb a reasonable amount of losses. Figure 3 shows the evolution of CAR
since the first quarter of 1997. As of the fourth quarter of 1997, the CAR of
commercial banks was around 10% but by the end of 2008, this ratio almost reached
15%. Commercial banks are now much more resilient to negative shocks. This is
mainly due to the financial reforms implemented by the Thai authorities in the last
decade and the changes implemented by commercial banks facing increased
competition.
Source: Bank of Thailand
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Higher Profits
As shown in Figure 4, at the height of the crisis, commercial banks had more
than a total of 100,000 million baht of losses. During 1999-2001, there have been
several huge swings in the net profits of commercial banks. However, since 2002,
commercial banks have higher and less volatile profits due to higher net interest rate
income and stronger non-interest income (see Figure 5).
Source: Bank of Thailand
Source: Bank of Thailand
Thai Banking System Remained Strong and Stable in 2008
Box 1 summarizes the health of the Thai banking system in 2008. The global
financial turmoil had very limited direct impact on the Thai banking sector. This is
due to the fact that Thai banks had low direct exposure to collaterised debt obligations
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(CDOs) and other problem assets. As of September 2008, exposure to CDOs was 0.02
percent of total assets (Bank of Thailand, Supervision Report 2007: 38). Moreover,
Thai banks are relying on local deposits as main source of funds. Table 3 confirms
that the local commercial banks had been in solid positions between 2004 and 2008.
Box 1
Thailand’s Banking System Performance in the Year 2008
The banking system recorded a net profit of 99 billion bahts in 2008, up from the previous year when the strengthened NPL provisioning rule, in line with International Accounting Standard No.39, was completed. The strengthened provision helps to ensure that banks have adequate cushion against future risk. Return on asset (ROA) stood at 1% in 2008, while the ratio of capital to risk asset (or the BIS ratio) stood at 14.2% as of December 2008, when the strengthened capital requirement under Basel II became effective. (The ratio as of September was 15.7%, when under the Basel I standards).
Loan growth accelerated in the first nine months but decelerated in the fourth quarter in line with the economic conditions. Overall, loan expanded by 11.4% for the year, up from the 4.7% growth recorded in 2007. Corporate loan (constituting 75.3% of total loan) and consumer loan rose at 10.5% and 14%, respectively. In contrast, deposit growth which fell in the first nine months of the year, accelerated in the fourth quarter, growing by 8.6% for the year, due to increased emphasis on mobilisation of deposit which constitutes core funding for liquidity enhancement, aided by low rate of return of risky assets in line with the downturn in the global stock market. Commercial banks also increased their fund mobilization via borrowing in the form of Bill of Exchange (B/E) which grew by 9.2%. With the convergence of deposit and loan growths, liquidity of the banking system improved, with the ratio of loan to deposit plus B/E easing to 88.3%.
Gross non-performing loans (gross NPLs) amounted to 397 billion bahts – a 56 billion bahts decrease from the end of 2007. The NPL per total loan ratio decreased with gross NPL and net NPL ratios standing at 5.3% and 2.9%, respectively. The decline in NPL resulted from loan repayment, debt restructuring, writing-off, and close monitoring of asset quality to prevent new NPL. The NPL ratio for both consumer and corporate loans decreased. However, there remains pressure on asset quality as indicated by the increase in special mentioned loan (i.e. loans which are past due by over 1 month but not exceeding 3 months), resulting from current global financial crisis which caused the slowdown in domestic and global economy, weighted down on loan repayment ability, thus commercial banks should remain vigilant and closely monitor their asset quality.
Source: Bank of Thailand News
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Table 3: Domestic Bank's Selected Financial Soundness Indicators
Q4/2004 Q4/2005 Q4/2006 Q4/2007 p Q4/2008 p
Capital Adequacy Ratio (%)
Capital funds/Risk assets 11.94 13.22 13.59 14.80 13.92
Tier 1 Capital/Risk assets 8.71 9.94 10.70 11.86 10.74
Asset Quality (%)
Non - performing loan/Loans 11.94 9.06 8.07 7.86 5.65
Loans/Deposits 87.64 83.15 87.74 92.97 102.65
Liquidity/Deposits and Borrowings n. a. 18.19 16.69 19.57 24.22
Off-balance-sheet Transactions/Assets 43.19 70.48 84.44 128.25 126.77
Loan Classifications (% of Total Loans)
Production 26.14 25.23 25.22 24.52 22.02 Wholesale, Retail Sale and Repair of Motor Vehicles, Motorcycles, Personal and Household goods 18.05 17.34 17.19 16.56 14.44
Financial Intermediation 11.84 11.03 9.82 9.35 17.57
Personal Consumption 16.60 19.02 21.67 23.84 22.62
Profitability (%) Net interest income and dividend/Average net assets (Per year) (NIM) 2.55 2.85 3.16 3.29 3.36
Net profit (loss)/Average net assets (Per year) (ROA) 1.25 1.36 0.77 0.12 1.00
Non-interest income/Total income 25.31 20.98 17.93 16.51 18.48 Source : Bank of Thailand
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How Good is the Thai Banking Sector in 2009?
The monetary authorities are cautious on the risk from the indirect impact
from the global economic slowdown on the real sector and “have emphasized the
importance of vigilance on risk monitoring including implementing stress tests to
ensure adequacy of capital, liquidity, and most importantly, risk management strategy
(Bank of Thailand, Supervision Report 2007: 14).” In the first quarter of 2009, the
subprime credit crisis had caused a drastically drop in Thailand’s exports, imports and
a higher rate of unemployment. Eventually, it had resulted in a decrease in Thailand’s
GDP growth rate by 5-6 % in the same period. It is expected that banks’ loan growth
will be slow. It is evidenced that the unfavorable macroeconomic environment in the
first quarter of 2009 had forced most of commercial banks to adjust their loan growth
from 8 percent to 5 percent in April 2009 (Thai Post, April 30th, 2009: 5). We can
foresee that the performance of the Thai banking sector in 2009 may not be as robust
as in the past few years. Fitch Ratings (Thailand) Limited predicted that Thai banks
were likely to face renewed asset quality, higher funding costs and a decline in loan
growth in 2009 (Fitch Ratings 2008:5).
Major Developments
The Implementation of Financial Sector Master Plan (FSMP) Phase I
The FSMP-I has 3 visions: (i) provide financial services to all potential
economically viable users whereby users should have access to basic financial
products and services at the appropriate pricing; (ii) develop competitive, efficient,
stable, and balanced financial system, capable of servicing the sophisticated and
unsophisticated users; and (iii) ensure fairness and protection for customers. Several
progresses have been made to strengthen the financial sector strategy and structure,
improve the depth and efficiency of the financial sector, and ensure customers’
protection. However, the progress in improving access to financial services by small
and medium-sized enterprises and low-income households still has not been fully
realized.
Regulatory Reforms
Risk based supervision by the BOT and risk management in the banking
system have been strengthened significantly since the crisis. In preparing for Basel II,
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the BOT has developed a range of risk management systems and a set of prudential
guidelines to enhance banks’ risk management practices. Furthermore, the BOT has
continuously conducted risk based examination and supervision focusing on strategic
risk, credit risk, market risk, liquidity risk, and operational risk of commercial banks.
The BOT also implements consolidated supervision for commercial banks. So far,
banks have undertaken organizational restructuring to enhance effective risk
management, internal control, and corporate governance, as well as improving risk
management tools.
2.2 Capital Markets
The equity and bond markets make up the second most important constituent
of the Thai financial system.
The Stock Market Thailand’s equity market, the Securities Exchange of Thailand (SET), was
established in 1975. It operates under the legal framework laid down in the Securities
and Exchange Act, B.E. 2535 (1992). It main operations include securities listing,
supervision of listed companies and information disclosure, trading, market
surveillance and member supervision, information dissemination and investor
education (www.set.or.th).
By the end of 1993 SET market capitalization had reached 105 percent of GDP
(Disyatat and Nakornthab, 2003: 4). Figure 6 shows the SET market capitalization
from 1996-2009. The market capitalization faced a major reduction due to the stock
index decline in 2008. As of January 2009, the market capitalization is around USD
100 billion. Figure 7 shows the SET index evolution from 1996 to 2009. The (SET)
was badly affected by the 1997 crisis. The SET Index had experienced sharp declines
since 1996. Before the crisis, the SET Index was over 1200 points. In the middle of
1998, at the height of the crisis, the index dropped to around 200 points. During the
period between 1999 and 2003, the SET index stabilized at around 400 points. Due to
better prospects in the economy, in December 2003, the SET index reached 772
points. The market stabilized at that level for a few years then fell back to 400 points
in November 2008 due to the financial crisis in the United States and negative
domestic factors such as the economic downturn and political turmoil in Thailand.
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Source: Stock Exchange of Thailand
Source: Stock Exchange of Thailand The Bond Market
Bonds were first introduced in Thailand during the reign of King Rama the 5th
in 1905 when the Thai government issued bonds of one million pounds in London and
Paris in order to develop a railroad project (www.bex.or.th). The Thai bond market
did not progress significantly in the past due to two main reasons. First, the
government did not issue any domestic bonds during 1987 and 1997 because of the
budget surplus. Second, before the existence of the Securities and Exchange Act in
1992, the law prohibited limited companies from issuing debentures (Disyatat and
Nakornthab, 2003: 4). Moreover, most bonds’ activities occurred off the Exchange
floor, or so called Over the Counter (OTC) – buying and selling through big
commercial banks- which deter small investors and some institutional investors from
investing in the bond market because the lack of transparency for both pricing and
quantity (www.bex.or.th).
To support the development of Thailand’s secondary bond market, the Stock
Exchange of Thailand (SET) officially launched the Bond Electronic Exchange
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(BEX) on November 26th, 2003. The SET committee allowed both government bonds
and corporate issues to be traded in its Exchange. Since the crisis, the size of the
domestic bond market has grown substantially mainly driven by the growth of the
government securities. Figure 8 shows the relative size of the government securities
and the corporate bonds according to the outstanding value. The Thai domestic bond
market is clearly dominated by the government securities. Figure 9 shows the
combination of new issuances of government securities, i.e. Treasury bills, state
agency bonds1, state-owned enterprise bonds, and government bonds. Since 2004, the
new issuance of state agency bonds has increased tremendously.
Source: The Thai Bond Market Association
Source: The Thai Bond Market Association
Before the financial crisis, the market for corporate bonds was virtually
nonexistent. In the first quarter of 1997, the issuance of debt from the corporate sector
amounted to only 3,709 million baht and remained at a very low level for several 1 State agency bonds consist of BOT bonds, Financial Institution Development Fund (FIDF) bonds and Property Loans Management Organization (PLMO) bonds.
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years. As shown in Figure 10, there has been a continuous increase of the new
issuance of private debt securities, starting from the third quarter of 2005. In the
second quarter of 2008, the issuance of corporate debt amounted to around 400,000
million baht, reflecting a surge in investment demand in the corporate sector.
However, there seems to be a downward trend of new corporate bond issues from the
second half of 2008 onwards due to Thailand’s economic recession. Figure 11 shows
the relative importance of commercial papers in the new issues of corporate bonds in
the last few years. Since 2006, the corporate sector has sought short-term financing
for working capital from the bond market. This confirms the increasing prominent
role of the bond market relative to the banking sector.
Source: Bank of Thailand
Source: The Thai Bond Market Association
2.3 Specialized Financial Institutions-SFIs
The third constituent of the Thai financial system consists of six government-
owned SFIs (see Table 1), accounting for 14 percent of total assets in 2008. During
the past few years the SFIs, in particular, the Government Savings Bank (GSB), the
Government Housing Bank (GHB), and the Bank for Agriculture and Agricultural
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Co-operatives (BAAC), had a more prominent role. This is due to the fact that SFIs
had been actively used by the Thaksin government to carry out the “populist” policies
in extending loans to the underserved segments of the population such as the poor and
small and medium sized enterprises (SMEs).
In Thailand, “SFIs serve as a government’s arm for the economic and social
development as well as certain policy implementation agencies in order to provide
financial assistance to specific sectors of the economy. With the range of services
provided such as housing credits, credits to SMEs, export-import credits or micro-
credits, SFIs are able to reach various types of customers, particularly low-income
groups who are unable to access the service of commercial financial institutions
(Menkhoff and Suwanaporn 2006:7).
The BAAC, established in 1966, has been the main source of credit for
farmers. It was upgraded to be the rural bank in order to provide loans beyond the
agricultural sector.
Table 4 presents some financial indicators for the three most important SFIs.
It demonstrates that all of these SFIs maintained Capital Adequacy Ratio-CAR at the
level higher than regulatory requirement. GSB had the highest CAR of 20.15 % in the
third quarter of 2008. Even though ROAs of these SFIs were lower in the third quarter
of 2008, the quality of capital of these SFIs remained strong. For asset quality,
measured by the ratio of NPLs to total loans, only GSB had done a good job. Its
NPLs/Loans ratio was the lowest at 3.72 % in the third quarter of 2008 and lower than
that of local commercial banks. BAAC had made a lot of improvement in its asset
quality in 2008. Its NPLs/Loans was 9.70 % in the third quarter of 2008 which was a
lot lower than in 2007 which stood at 11.30 %. GHB had the worst asset quality. Its
NPLs/Loans was 16.40% in the third quarter of 2008 which was double that of 2007
since GHB had to comply with the “populist” policy implemented by the Thaksin
Government in extending loans to build houses for the poor. It is not surprising for
GHB to have higher NPLs/Loans ratio since its loan/deposit ratio of GHB was so
high. It was 122 % in the third quarter of 2008 while those of BAAC and GSB were
102 % and 76.8 % respectively in the same period. Only GSB had higher return on
assets (ROA) in third quarter of 2008 than that in 2007 whereas ROAs for BAAC and
GHB in the third quarter of 2008 were about half of that in 2007.
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Table 4: SFI’s Selected Financial Soundness Indictors
Institutions Ratio 2002* 2003* 2004* 2005 2006 2007 9M2008
Capital Adequacy Ratio (%) GSB Capital funds/Risk assets (BIS Ratio) 33.00 30.40 29.40 25.40 22.30 22.30 20.15 GHB Capital funds/Risk assets (BIS Ratio) 10.10 10.80 8.60 9.40 10.60 10.60 10.20 BAAC Capital funds/Risk assets (BIS Ratio) 9.40 10.80 12.90 10.80 10.80 12.90 11.4
Asset Quality (%)
GSB Non - performing loan/Loans 3.10 3.10 2.70 3.60 3.80 3.70 3.72 Loans/Deposits 68.10 70.30 72.90 76.88
GHB Non - performing loan/Loans 19.80 11.50 9.30 10.30 8.80 8.80 16.40
Loans/Deposits 129.00 124.40 122.60 122.00
BAAC Non - performing loan/Loans 7.90 6.60 5.40 5.10 4.60 11.30 9.7 Loans/Deposits n.a. n.a. n.a. 97.80 86.30 87.30 102.5
Profitability (%)
GSB
Net interest income and dividend /Average net assets (Per year) (NIM)
2.61 2.68 3.02 3.30 3.49 3.45 3.57
Net profit (loss)/Average net assets (Per year) (ROA)
2.12 1.71 1.83 1.80 1.40 1.50 1.88
Non-interest income/Total income** n.a. n.a. n.a. 7.53 5.54 5.46 6.27
GHB
Net interest income and dividend/ Average net assets (Per year) (NIM)
1.48 1.55 1.66 1.50 0.90 1.10 1.98
Net profit (loss)/Average net assets (Per year) (ROA)
0.63 0.96 1.04 0.90 0.40 0.60 0.26
Non-interest income/Total income** n.a. n.a. n.a. 7.71 4.99 4.39 3.49
BAAC
Net interest income and dividend /Average net assets (Per year) (NIM)
4.58 3.46 5.14 5.40 5.30 5.60 2.6
Net profit (loss)/Average net assets (Per year) (ROA)
0.20 0.20 0.20 0.30 0.50 0.90 0.4
Non-interest income/Total income** n.a. n.a. n.a. 8.19 7.42 6.11 4.08
Source: State Enterprise Review, State Enterprise Policy office * Specialized Financial Institutions’ Annual Report 2003-2004
** Calculated from State Enterprise Review 2007, Q2/2008 (only BAAC) and Q3/2008
2.4 Non-bank Financial Intermediaries
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Non-bank Financial Intermediaries are the final constituent of the Thai
financial system, accounting for 11 percent of total Thai financial sector assets in
2008. Life insurance companies play the most important role in this constituent,
accounting for 5.2 percent of total assets whereas the significance of finance
companies is negligible, accounting for only 0.3 percent of total assets as of 2008.
Insurance Industry
The Thai insurance market had been closed for decades until the government
liberalized it in the late 1990s. This has resulted in about 100 insurance companies
operating in the market. In 2009, there are 25 life insurers, 72 non-life insurers and 2
reinsurance companies.
The Thai life insurance industry starts with the establishment of a foreign
company, American Life Assurance, AIA, in 1931. Eleven years later the first Thai
insurance company, Thai Life Insurance, was established (Karim and Jhantasana
2005: 21).
The growth rate of the Thai insurance business between 2000 and 2007 was
very impressive. It was higher than Thailand’s GDP growth rate and reached its peak
at 20.12 percent in 2001. Since then it had continuously declined to 8.05 percent in
2007 (see Table 5). However, the life insurance companies had the highest growth
rate at 24.75 percent in 2001.
Table 5: Growth in Insurance Industry (%)
Item 1999 2000 2001 2002 2003 2004 2005 2006* 2007* GDP 4.4 4.8 2.2 5.3 7 6.2 4.5 5.0 5.0 Insurance Business 1.31 14.7 20.12 19.27 14.8 12.76 10.71 8.69 8.05 Life Insurance 11.02 20.94 24.75 22.41 15.44 13.47 10.25 8.00 7.00 Non-life Insurance -9.48 6.17 12.93 13.87 13.63 11.42 11.58 10.00 10.00 Remarks: * indicates estimates Source: Annual Report 2006, Department of Insurance, Ministry of Commerce.
The insurance sector in Thailand is relatively small by world comparisons. In
2005, the Thai’s insurance penetration ratio, which is a ratio of premiums to GDP,
was 3.60 percent whereas the world average was 7.52 percent (see Figure 12). In
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2003, only fifteen percent of population holds life insurance policies with a premium
of about 3 billion dollars (Karim and Jhantasana 2005: 22).
The Thai life insurance industry is heavily concentrated with the five largest
insurers control 51 percent of the market share in 2007 (see Table 6). The market is
dominated by AIA, a foreign branch, which holds 38.71 percent of the market while
the largest local company, Thai Life Insurance, has a market share of 15.23 percent.
In order to reform and strengthen the insurance industry, the Commission for
Regulation and Promotion of Insurance Business Act 2007 established a new industry
regulator, which is widely known as the Insurance Commission, to replace the
previous one which was housed under the Ministry of Commerce. The new regulator
is shifted to be under the supervision of the Ministry of Finance which is more
suitable than the Ministry of Commerce in overseeing the insurance industry.
Figure 12: Insurance Penetration (premiums in % of GDP in 2005)
Source: Annual Report 2006, Department of Insurance, Ministry of Commerce
Currently, new insurance products offered include voluntary motor insurance
policy type 4, non-performing loan insurance, weather index insurance, unit-linked
insurance, high-rise building insurance and universal life insurance (Annual Report on
Insurance Business 2006, Office of Insurance Commission: 1).
Table 7 presents profit and loss statements of life insurance companies in Thailand for
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Table 6: Market Share of Direct Premiums of Life Insurance For the Year Ending 31 December 2007
Number
Grand Total
Companies Direct Premiums %
1 A.I.A 78,176,300 38.71
2 THAI LIFE INSURANCE 30,752,812 15.23
3 AYUDHYA ALLIANZ C.P. 19,234,623 9.52
4 MUANG THAI LIFE 13,684,133 6.78
5 BANGKOK LIFE 12,496,026 6.19
6 SIAM COMMERCIAL NEW YORK LIFE 12,132,668 6.01
7 OCEAN LIFE 8,975,925 4.44
8 KRUNGTHAI AXA LIFE 5,823,741 2.88
9 ING LIFE LIMITED 4,935,790 2.44
10 THANACHART LIFE 3,355,694 1.66
11 FINANSA LIFE 2,069,288 1.02
12 PRUDENTIAL TSLIFE 1,875,913 0.93
13 SOUTH EAST LIFE 1,565,379 0.78
14 THAI CARDIF LIFE 1,403,244 0.69
15 MAX LIFE ASSURANCE 1,228,091 0.61
16 ACE LIFE ASSURANCE 1,081,985 0.54
17 GENERALI LIFE 956,590 0.47
18 MILLEA LIFE INSURANCE 676,034 0.33
19 SIAM SAMSUNG 633,347 0.31
20 MANULIFE INSURANCE 507,933 0.25
21 SIAM LIFE INSURANCE 141,505 0.07
22 ADVANCE LIFE 140,424 0.07
23 SAHA LIFE INSURANCE 81,039 0.04
24 BUI LIFE INSURANCE 13,576 0.01
Total 201,942,058 100.00
Source: Office of Insurance Commission
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the year 2003 to 2007. It indicates that life insurance companies had enjoyed profit
every year. Moreover, the growth rate of the profits had increased almost every year
(except 2006) during that time. However, it should be noted that foreign branches had
a lot higher profits than that of domestic ones. This may reflect that Thai life
insurance companies can not compete with the foreign counterparts. Nevertheless,
since 2005 the profit share of local companies had improved significantly whereas
that of the foreign ones had decreased.
With the mission of the new regulator to enhance the strength and stability of
Thai insurance industry, it is hoped that the new regulator will encourage more people
to take out insurance policies despite the economic slowdown.
Table 7: Comparative Profit and Loss Statement of Life Insurance Business (Unit): 1,000 (Bath)
Year
Net Profit Increase(Decrease)
Domestic Companies
Foreign Branch Grand Total Amount %
2003 1,356,630 (14.12%) 8,249,026 (85.88%) 9,605,656 (100.00%) 4,546,535 89.87
2004 773,161 (7.31%) 9,804,212 (92.69%) 10,577,373 (100.00%) 971,717 10.12
2005 3,644,298 (25.91%) 10,423,104 (74.09 %) 14,067,402 (100.00%) 3,490,029 33.00
2006 3,089,773 (23.26 %) 10,193,002 (76.74 %) 13,282,775 (100.00%) (784,627) (5.58)
2007 5,280,371 (36.85 %) 9,047,258 (63.15 %) 14,327,629 (100.00%) 1,044,854 7.87
Source: Office of Insurance Commission 3. Recent Financial Sector Reform
Since 1997, the Thai monetary authorities, especially the Bank of Thailand,
have made several reform measures to strengthen the supervision framework and
improve the financial system infrastructures. The framework has shifted to more
market-oriented with the emphasis on corporate governance, internal control, and risk
management (Bank of Thailand, Supervision Report 2003: 45). The risk management
includes credit risk, market risk, liquidity risk, operational risk and information
technology (IT) risk. For years, the Bank of Thailand has improved the supervision
22
framework in line with international standards. This has contributed to the improved
risk management and resiliency of the banking system. In addition, the Bank of
Thailand has introduced various prudential policies and supervision guidelines related
to risk management in order to strengthen financial institutions, increasing
competition and protecting consumers.
In 2007, three new important laws which are necessary for effective banking
supervision were enacted, namely, the Amended Bank of Thailand Act B.E. 2551, the
Financial Institution Business Act B.E. 2551 (FIBA) (replacing the Commercial
Banking Act B.E. 2505 and the Act on the Undertaking of Finance Business,
Securities Business and Credit Foncier Business 2522) and the Deposit Protection
Agency Act B.E. 2552 (DPA)(replacing the blanket deposit guarantee scheme
implemented right after the 1997 Financial Crisis).
The amended BOT Act “stipulates the independence, transparency and
accountability of the bank of Thailand, as well as expanded the Bank of Thailand’s
capacity to manage assets and conduct monetary policy more efficiently (Bank of
Thailand, Supervision Report 2007:36).” Moreover, the law specifies explicitly the
term, and the process for appointing and dismissing the Governor.
The objective of the FIBA is to strengthen supervisory framework of the
financial institution system by clearly separating the role and responsibility between
the Ministry of Finance and the Bank of Thailand. The Bank of Thailand is
empowered to supervise and close financial institutions whereas the Ministry of
Finance is empowered to grant and revoke license. Moreover, the Bank of Thailand is
offered additional power to “conduct consolidated supervision over financial
conglomerates, implement prudential regulation to comply with the Basel Core
Principles, and oversee consumer protection (Bank of Thailand, Supervision Report
2007:36)”.
The DPA Act “is responsible for providing compensation to depositors when
a financial institution’s license is revoked and acting as a liquidator for such an
institution (Bank of Thailand, Supervision Report 2007: 37)”. It will take five years to
eventually reduce maximum coverage to one million baht per depositor per financial
institution. However, due to the Global Financial Turmoil, the DPA Act has been
revised in 2008 (see Table 1, Appendix I).
23
(Table 1, Appendix I summarizes the reform measures in the Thai Financial Sector
taken in 2008 and 2009.)
4. Financial Deregulation and Liberalization
Unlike many East Asian newly industrialized economies (NIEs) which
embarked on their financial liberalization programs in the early 1980s, Thailand
began its financial liberalization in the late 1980s and accelerated in the early 1990s
(Zhang 2002: 1). Changes in the international environments, for instance, trade in
services were included in the Uruguay Round. Pressures from developed countries
and the International Monetary Fund (IMF) were the main factors that accelerated the
Thai monetary authorities to liberalize the financial sector. In addition, the
government’s desire to become the financial regional center was an additional factor
that prompted the pace of the financial liberalization in Thailand.
The financial sector reform policy in the late 1980s was formulated in a
regional context because the fundamental changes in the political and economic
landscape of Indochina over the 1980’s were taken into account (Zhang 2003: 105).
The Bank of Thailand had launched the first long-term financial reform plan (1990-
1992) with an ambitious goal to turn Bangkok into a regional financial center
replacing the one in Hong Kong and Singapore (Nidhiprabha 2003: 40). The purpose
of the financial sector reform was to “ensure an efficient allocation of resources and
greater flexibility in the economy’s adjustment to changes and to the increasingly
competitive environment” (the Bank of Thailand Annual Report 1992).
The Bank of Thailand implemented 4 major policies on financial deregulation
and liberalization. They were as follows:
3.1 Interest rate liberalization.
3.2 Foreign exchange liberalization.
3.3 Relaxation in financial institutions’ portfolio management, and
3.4 Expansion in the scope of the operation of financial institutions (the
Bank of Thailand Annual Report 1992).
4.1 Interest rate liberalization
Prior to interest rate liberalization, financial institutions under the supervision
of the Bank of Thailand which are commercial banks, finance companies and credit
24
fonciers were constrained by ceilings on interest rates and on the expansion of credit.
This had caused the distortion in the financial markets and hindered efficient
allocation of resources in the financial sector.
These ceilings served as binding constraint on interest rate movement in an
upward direction only (Wibulswasdi 1986: 30). The monopolistic power in the
commercial banking sector, due to the high degree of concentration of the ownership,
led to cartel-like organization in which commercial banks collectively, through the co-
ordination of the Thai Bankers’ Association (TBA), set lending interest rates at any
level below official ceilings (Wibulswasdi 1986: 30; Zhang 2003: 108). But for the
deposit rate, there was a certain degree of downward rigidity as commercial banks
were reluctant to offer interest rates lower than official ceiling rates (Wibulswasdi
1986: 30).
In order to turn Bangkok to be the regional financial centre, interest rate
liberalization is required. Ceilings of various interest rates of the aforementioned
financial institutions were gradually removed. It took 3 years for the Bank of Thailand
to accomplish this task, starting with the abolition of ceiling on commercial banks’
time deposit rates with maturity exceeding 1 year in June 1989. The rationale behind
this was aimed at creating a more flexible interest rate system and encouraging
longer-term savings as well (Wibulswasdi 1995: 2). The next two and a half more
years, ceilings on commercial banks’ savings deposits were abolished in January
1992. And finally, in June1992 ceilings on all remaining interest rates including
ceilings on deposits at finance and credit foncier companies were removed.
25
Table 8: The Abolition of Interest Control 1989 June Abolition of interest rate ceiling on commercial banks’ time
deposits with maturity exceeding 1 year. 1992 January Abolition of interest rate ceiling on savings deposits at
commercial banks. 1992 June Removal of ceilings on lending and borrowing rates of financial
and credit foncier companies. Remaining ceiling on bank lending rates was removed.
1993 October Commercial banks are required to announce the Minimum Loan Rate (MLR), the Minimum Retail Rate (MRR) and maximum margin to be added to MRR as a reference rate for customer other than those eligible for MLR.
Source: Bank of Thailand
Table 8 summarizes the process of removal of interest rates ceilings in
Thailand’s financial sector in the late 1980s and the early 1990s. Moreover, to
safeguard the interest of small borrowers the Bank of Thailand in October 1993
introduced a minimum retail rate –MRR as a reference lending rate (or bench mark
rate) for small but good-quality borrowers. All commercial banks were required to
announce a minimum retail rate-MRR which was based on each bank’s cost of funds
(Wibulswasdi 1995: 2).
Theoretically, financial liberalization should benefit the general public in
terms of lower interest spread and profit margin, smaller service charges, and greater
access to credit lines (Vichyanond 1995: 18). Unfortunately, such gains did not
materialize because Thailand’ financial deregulation concentrated on abolishing direct
financial controls such as removing the ceilings interest rates rather than on increasing
competition in the financial sector (Zhang 2003: 2).
Higher degree of competition is required for interest rate liberalization to bring
about efficient resource allocation. One of the long lasting implicit Thailand’s
monetary policy stances had been to protect Thai banks against foreign banks. For
thirty years prior to the crisis, Thailand’s monetary authorities did not allow any new
entry into the banking sector. Thus, removing interest rate ceilings without keen
competition in the financial sector had resulted in inefficiency in the Thai banking
industry. This could be evidenced from larger interest rate spreads of Thai banks
between 1990 and 1991 which was increased and was larger than that of foreign
counterparts. Table 2, Appendix I indicates that the interest spread, the difference
26
between minimum lending rate and 12-month time deposit rate, after the Asian
Financial Crisis were larger than that before the crisis.
Prior to 1992 large banks acted as price leaders in setting up bank interest rates
and small banks followed suit. Nidhiprabha demonstrated that after interest rate
liberalization such practices are changed. The interest rate liberalization allows each
bank to set its own interest rates according to its cost structure and own market niche
and in some cases small banks became price leaders (Nidhiprabha 2003: 29).
Currently, domestic interest rates particularly money market rates-inter-bank
rates- are more volatile because they are sensitive to movements in the world interest
rates especially the US Federal Funds rate.
4.2 Foreign Exchange Liberalization
Thailand like most emerging economies relaxed the restrictions on capital
controls in the 1990s. Thai monetary authorities thought that the turn of the 1990
decade was the right time to start foreign exchange liberalization since Thailand’s
external conditions then were relatively stable. The international reserves were high –
equivalent to 5 months of imports; low debt-service ratio which was 10 percent
compared to 20 per cent in the first half of 1980s. Moreover, “The country’s practice
of exchange control was, in practice, in conformity with Article VIII requirements for
many years; i.e., there were no restrictions on payments for current account
transactions and no discriminatory currency arrangements or multiple currency
practices” (Wibulswasdi 1992: 34). Thus, as a first sign or first stage of financial
liberalization, Thailand in May 1990 accepted the obligations under the Article VIII
of the IMF’s Articles of agreement which lifted all controls on all foreign-exchange
transactions on the current account. Many observers pointed that this marked the
beginning of the series of financial liberalization measures and the origins of the 1997
Asian Financial Crisis.
Commercial banks were allowed to (i) process customers’ applications for the
purchase of foreign exchanges for trade-related transactions without prior approval
from the Bank of Thailand and (ii) approve outward transfer of foreign exchange in
small amounts not exceeding $US 500,000 for remittance of loans, sale of securities,
or liquidation of companies. Funds for Overseas trip were limit to $US 20,000 per trip
(Wibulswasdi 1992: 34).
27
The Bank of Thailand announced the second stage of foreign exchange control
deregulation on April 1, 1991 allowing private businesses and the general public more
flexibility in purchasing and selling foreign exchanges. Residents were permitted to
open foreign currency accounts if the funds originated from abroad. However, the
acquisition of real estate and investment in the stock market abroad were still required
the Bank of Thailand’s approval. On May 1992, further exchange rate liberalization
measures were pursued; prior approval from the Bank of Thailand was not required
for exporters to use foreign exchange receipts to repay foreign debts. Nonresidents
were permitted to open foreign currency accounts (Nidhiprabha 2003: 31).
“In February 1994, more investment or lending abroad was allowed and more baht
notes were permitted to be carried into neighboring countries. In general, there were
fewer constraints on commercial banks’ portfolio management by the mid 1990s
(Institute for International Monetary Affairs 2006: 20).
Bangkok International Banking Facilities (BIBFs)
The second milestone in opening up of the Thai financial system was the
gradual opening of the capital account through the launching of the Bangkok
International Banking Facilities (BIBFs) in 1993 (Siamwalla 2000: 3).
The Bangkok International Banking Facilities (BIBFs) provided three types of
services: (1) banking to nonresidents in foreign currencies and Baht (“out-out”
transactions),(2)banking to domestic residents in foreign currency only (“out-in”
transactions), and (3) international financial and investment banking services. The
BIBF units must mobilize fund from overseas and extend credits only in foreign
currencies (Financial Institutions in Thailand 1998:50).
To enable BIBFs to compete with financial institutions in other financial
centers various tax privileges were granted: the corporate income tax was reduced
from 30 to 10 percent; exemptions were provided for the sales tax and stamp duties;
and the withholding tax rate on interest payments was reduced from 15 to 10 percent
for “out-in” transactions (Annual Economic Report 1993, Bank of Thailand: 54).
Financial liberalization through BIBFs induced a flood of capital inflows into
Thailand, especially into its banking sector in the period 1990-96. The BIBF’s credits
reached its peak in 1997 at 1,882 billion Baht or about 40 per cent of GDP compared
with 1,290 billion Baht in 1996. However, the BIBF’s credits had been decreasing
28
since 1998 but it was still at high levels. In 2005 this figure drastically dropped to 76
billion Baht (see Table 3.3). Since September 2006 according to “One Presence
Policy” under the Financial Sector Master Plan (FSMP) the BIBF operations were
abolished. Commercial banks registered in Thailand and foreign bank branches had to
return IBF licenses to the Ministry of Finance.
Four years after the Bank of Thailand had launched the BIBFs, Thai banks
were the major players in “out-in” business (except year 1995) due to strong customer
base; whereas foreign banks BIBF units with no branches in Thailand dominated the
“out-out” business. But after the 1997 Asian Financial Crisis foreign banks with Full
Branches in Thailand had become the major players in both “out-in” and “out-out”
businesses.
The Bank of Thailand hoped that the BIBF lending would concentrate on the
“out-out” activities –fund raised abroad and lent to the Indochina countries- rather
than on the “out-in” business. But it turned out that the size of the “out-in” lending
was about 80 % of the total BIBF lending between 1993 to 2005 (see Table 3
Appendix 1) This was attributed to the relatively high interest rates in Thailand. The
“out-in” capital flows led to excessive credit expansion to private sectors. This fuelled
investment spending in the non-traded goods sector, speculation, and current account
deficits. Speculative and imprudent lending from BIBFs inflated several “bubble
sectors” especially in the stock markets and the real estate sector.
The BIBFs operations were the main cause of the rapid increase in Thailand’s
external debt particularly the short-term ones. The debt-to-GDP ratio rose from 39.2
percent in 1992 to 48.7 percent in 1996 (Annual Economic Report 1996. The Bank of
Thailand: 104). Table 10 and Figure 13 indicate that Thailand’s short-term external
debt had increased between 1992 and 1995 and BIBFs were the main factor
responsible for such increase especially for banks.
The monetary authority believed that the establishment of the BIBF was the
first step in the process of promoting Thailand as a financial center of the region
(Annual Economic Report 1998, The Bank of Thailand: 58). But it turned out that
BIBF had contributed to the East Asian Financial Crisis.
29
Table 10 Thailand’s Short-term External Debt, 1992-96 ( In Billion US dollars)
1992 1993 1994 1995 1996 Total Short-term 18.9 22.6 29.2 41.1 39.2 Bank 5.5 10.4 21.5 33.7 31.3 Commercial Banka 5.5 4.0 6.4 10.0 8.4 BIBF - 6.4 15.1 23.7 22.9 Public 0.6 0.0 0.2 0.1 0.0 Non-bank 12.8 12.2 7.5 7.3 7.9 Source: Annual Economic Report 1996, Bank of Thailand; pp.105 4.3 Relaxation in Financial Institutions’ Portfolio Management
Previously, financial institutions were subjected to various kinds of bank
regulations which contributed to higher costs of banking operations. In order to make
banks more stable and restore the solvency of the financial system, the Bank of
Thailand relaxed constraints imposed on financial institutions as follows.
Figure 13
Thailand External Debt 1992 - 2008
0.00
20,000.00
40,000.00
60,000.00
80,000.00
100,000.00
1992
1994
1996
1998
2000
2002
2004
2006
2008
Year
Million of US dollar
Short-term Debt Long-term Debt
Source: Bank of Thailand 4.3.1 Branch opening. Earlier, before opening up branches commercial banks were
required to hold a certain amount of government bonds to finance government budget
30
deficits. Starting in November 1990 the Bank of Thailand lowered the ratio of bond
holding requirement from 16 percent of total deposits to 9.5 percent. Then the ratios
had been decreased to 8 percent in September 1991, 7 percent in February 1992, 6.5
percent in October 1992, 5.5 percent in February 1993 and nil in May 1993
(Vichyanond 1995).
4.3.2 Rural credit requirement. Previously, commercial banks had an obligation to
allocate no less than 20 percent of their deposits to the agricultural sector.
Commercial banks found it difficult to comply with this regulation since the definition
of the “agricultural credit” was too narrow. Thus in 1987, 1991, and 1992 the Bank of
Thailand changed the name of the “agricultural credit” to the “rural credit” and
modified the loan to cover more related occupations which included regional small-
scale industries, wholesale trading of agricultural produces, regional industrial estate,
farmers’ secondary occupations and the exportation of farm products (Vichyanond
1995). The rationale behind this modification was to support the rural development
strategy implemented then (Wibulswasdi 1987).
4.3.3 Reserve requirement. In June 1991, the Bank of Thailand required financial
institutions to maintain a liquidity ratio in place of the reserve requirement ratio. This
allowed commercial banks to substitute other securities for government bonds and
manage their assets more efficiently. Commercial banks are now required to hold
liquid assets at no less than 6 per cent of total deposits.
4.3.4 Capital adequacy ratio. On the first of January 1993, the Bank of Thailand
modified the regulations on capital adequacy ratio in order to comply with the
guidelines of the Bank for International Settlements (BIS). Commercial banks’ capital
funds are divided into first tier and second tier. First tier capital comprised paid-up
capital, legal reserves; reserves appropriated from net profits and retained earning.
While the second tier capital funds are 50 percent of the revaluation of buildings and
land, hybrid debt instruments and subordinated term debts (the Bank of Thailand
Annual Report 1992: 109).
31
Thai commercial banks were required to maintain a minimum capital ratio of 7
percent of total assets and contingent liabilities (off-balance-sheet items); within with
at least 5 percent must be first tier capital. By the end of 1994, these two ratios were
adjusted upward to 9 percent and 5.5 percent respectively (Vichyanond 1995).
Branches of commercial banks incorporated abroad or foreign banks were required to
maintain capital funds in Thailand as well and the adequacy ratio was 6.25 percent of
total assets and contingent liabilities. Thai commercial banks are now required to hold
8.5 percent of the capital adequacy ratio.
4.4 Expansion in the Scope of the Operation of Financial Institutions
To promote greater competition in the supply of financial services the Bank of
Thailand allowed financial institutions to undertake new related businesses. Effective
14 March 1992, commercial banks were permitted to carry out three new types of
business namely, underwriting government’s and state enterprises’ debt instruments,
providing economic, financial and information services, and providing financial
advisory services in mergers, acquisition and take-over cases. In June 1992, additional
businesses were added for commercial banks to operate including managing, issuing,
underwriting and trading of debt instruments. Nevertheless, approval from the Bank
of Thailand was required. Other businesses, requiring no prior approval from the
Bank of Thailand, were agents for the sale of mutual funds, secured debentures
holders’ representatives, mutual fund supervisors, and securities registrar. However,
approval from the Securities and Exchange commission-SEC was required for the last
three businesses (the Bank of Thailand Annual Report 1992:106).
For finance companies and finance and securities companies, new services
offered to them to operate were leasing services, acting as selling agents for public
debt instruments, arrangers, underwriters, and dealers for debt instruments and act as
mutual fund supervisors (the Bank of Thailand Annual Report 1992: 51).
5. Weaknesses in the Thai Financial and Banking Systems
Even though the Thai financial system has gone through various reforms
within the last decade, there are underlying weaknesses which have still to be
addressed. Some of the weaknesses are discussed below.
32
5.1 There are too many regulatory authorities in the Thai Financial Sector
Figure 14 demonstrates that financial institutions in Thailand are subject to
different laws and regulated by different agencies. For instance, the Bank of Thailand
supervises three financial institutions: commercial banks, finance companies and
credit foncier companies. The Fiscal Policy Office, under the Ministry of Finance,
oversees SFIs. The Insurance companies are under the supervision of the Insurance
Commission, the Ministry of Finance. SEC, an independent agency, supervises
securities companies, the stock market, and derivative and future markets.
Figure
14:
Regulatory Authorities Structure
of Thai Financial System
33
The current institutional structure of regulatory and supervisory agencies in
the Thai financial sector as mentioned above has resulted in sub-optimal, less
efficient, costly and cause inconsistencies in supervising and regulations among
various monetary regulators. The blurring business line between different types of
financial institutions calls for a convergence of regulation and supervisory practices.
A question that arises is whether Thailand needs a single financial authority
like the one in Singapore, namely, the Monetary Authority of Singapore-MAS.
During the Thaksin Administration, the Ministry of Finance floated the idea that a
new monetary authority should be set up to oversee all financial institutions. The
financial institutions under the supervision of the Bank of Thailand should be
transferred to the new authority and the Bank of Thailand should be solely responsible
for the monetary policy. Of course, this idea is opposed by the Bank of Thailand. We
think that it is timely to raise this question and seriously debate it in order to improve
the overall supervision of the financial sector for the benefit of the majority of the
people.
5.2 The Thai financial sector operates inefficiently
Chansarn (2005) had studied to investigate the efficiency in the Thai financial
sector after the financial crisis (1998-2004) using the total factor productivity (TFP)
growth. He found that “the efficiency in the Thai financial sector, the commercial
bank sector, and the finance and securities company sector was diminishing over the
period of 1998-2004, while the efficiency in the insurance company sector remained
unchanged over the same period. However, the sharp decrease in efficiency in these
three sectors occurred only over the period of 1998-1999, while the efficiency was
decreasing very slightly over the period of 1999-2004 (Chansarn 2005).
Table 11 confirms that even though the operating environment of the banking
sector in Thailand has undergone major changes in recent years, Thai banks still can
not compete with foreign counterparts. Thai commercial banks operate less efficient
than foreign banks. With a unit of bank resource, foreign branch banks can operate at
a higher profit. For in stance, a Thai commercial banks’ employee could make net
profit only 0.68 million baht in the first quarter of 2009 whereas that of the foreign
branch bank was 298.47 million baht in the same period. This reflects that Thai
34
financial institutions can not compete with foreign counterparts. The reason is that
foreign branch banks have skill advantages in sales and marketing, product
innovation, and risk management as well as access to cheaper source of funds.
Foreign financial institutions, particularly commercial banks, should be
allowed to play more important role in the Thai financial sector. During the past three
decades, the Thai monetary authorities were reluctant to encourage foreign
participation in the market. There had been an implicit policy of the Bank of Thailand
that protected Thai banks over foreign counterparts which had led to incompetence of
Thai banks before the 1997 Financial Crisis. “Foreign penetration has had positive
effects on Thailand on the sense that they promoted market competition and improved
the operational efficiency of banking. In addition, foreign acquisition of Thai domestic
banks introduced advanced skills and technology helping upgrade the business
operations of banks (Okuda and Rungsomboon, 2006)”. Fortunately, one of the
objectives of the Financial Sector Master Plan (FSMP) Phase II is to increase
competition within the financial sector through offering greater foreign participation.
It remains to be seen whether this will be materialized.
Financial Ratio Q4/2004 Q4/2005 Q4/2006 Q4/2007 p Q4/2008 p Q1/2009 p
35
Table11: Efficiency Ratio (Millions of Baht) of Thai Commercial Banks and Foreign Branch Banks Source: Bank of Thailand 5.3 The size of Thailand’s capital market is relatively small
Average Average Average Average Average Average
Thai Commercial Banks
Average net assets/Number of bank's branches 1,592.00 1,659.26 1,510.00 1,510.90 1,503.85 1,573.25
Average net assets/Number of bank's employees 71.00 74.34 88.52 72.93 70.58 74.96
Net profit (loss)/Number of bank's employees (Per year)
0.89 1.01 0.68 0.08 0.71 0.68
Net profit (loss)/Number of bank's branches (Per year)
19.93 22.61 11.61 1.75 15.08 14.33
ATM cards and other e-banking services income/Number of bank's ATM (Per year)
0.76 0.62 0.48 0.44 0.38 0.45
Salaries and employee benefits/Number of bank's employees (Per year)
0.50 0.53 0.70 0.62 0.64 0.69
Foreign Branch Bank
Average net assets/Number of bank's branches 79,520.77 75,843.19 78,142.37 84,308.32
Average net assets/Number of bank's employees 263.31 284.59 291.58 298.47
Net profit (loss)/Number of bank's employees (Per year)
2.44 3.94 3.91 3.17
Net profit (loss)/Number of bank's branches (Per year)
738.45 1,050.12 1,047.00 894.64
ATM cards and other e-banking services income/Number of bank's ATM (Per year)
n.a. n.a. n.a. n.a.
Salaries and employee benefits/Number of bank's employees (Per year)
1.37 1.51 1.51 1.36
36
Even though the SET has been operated for over 30 years, the Thai equity
market still has a limited number of listed firms and thin trading volume. As of
December 2008, there were 488 listed companies in the SET, 52 companies in Market
for Alternative Investment (MAI) and 4 companies in the BEX. Moreover, the
number of people engaging in the capital market is negligible compared with other
countries. As of 2005 only 0.42 percent of Thai population invested in the stock
market whereas that of Taiwan and Japan were 57 % and 27 % respectively (Invest
Company Institute; SEC; SET). In 2006, there were 478, 585 client accounts with
securities companies and only 25 % were active accounts (SET). Out of the total
client accounts, .032 % or 15,562 accounts belonged to foreign clients, of which 18
percent was active accounts (Thailand Securities Depository Co., Ltd. (TSD)).
Some financial analysts believe that the Thai Stock Market still lack good
governance and transparency. It seems that the SEC and the SET tend to favor large
investors. Some investors are skeptical that illegal practices such as an insider trading
still persist. It is impossible to raise funds in the stock market without the protection
of small investors (Okuda 2007). The corporate governance mechanisms should be
improved to prevent large investors from exploiting small investors.
5.4 Steps need to be taken to develop an inclusive financial system
One of the visions of FSMP is to provide financial services to all economically
viable users. In Thailand there are many savings groups providing basic lending and
deposit services to members. However, most of them still lack management and
liquidity support. Before they can obtain liquidity from financial institutions, these
savings groups have to be strong and well run. Injecting money to weak groups will
destroy credit discipline. In addition, the Village Fund Initiative also has flaws due to
inappropriate incentives and weak organization. How can we encourage financial
institutions to provide services to the poor? Can microfinance be the answer? To
accomplish this vision, more concrete efforts need to be taken.
References
37
Bank of Thailand. Annual Economic Report, Bangkok.various issues. ______________. Quarterly Bulletin, Bangkok, various issues. ______________. Financial Institutions and Markets in Thailand (1998),Bangkok. ______________. Supervision Report, Bangkok, Various issues. Chansarn, S. “The efficiency in Thai financial sector after the financial crisis,” BU Academic Review. Volume 6 Number 2 (July- December 2007). Department of Insurance. Annual Report on Insurance Business. Bangkok. Various issues. Disyatat, P. and D. Nakornthab. “The Changing Nature of Financial Structure in Thailand and Implications for Policy,” Bank of Thailand Discussion Paper (2003): 1- 34. Fitch Ratings (Thailand) Limited. “Impact of Global Financial Crisis and Political Turmoil on Thai Banks,” 22 October 2008. Insurance Commission. Annual Report on Insurance Business. Bangkok. Various issues. Karim, M. and C. Jhantasana. “Cost Efficiency and Profitability in Thailand Life Insurance Industry: A Stochastic Cost Frontier Approach,” International Journal of Applied Econometrics and Quantitative Studies. Vol. 2-4 (2005). Menkhoff, L. and C. Suwanaporn. “10 Years after the Crisis: Thailand’s Financial System Reform,” Discussion Paper 356 (January 2007) : 1-25. Nidhiprabha, B. “Premature Liberalization and economic crisis in Thailand,” In Financial Liberalization and the Economic Crisis in Asia. Edited by Chung H.Lee, 27-46. London and New York, RoutledgeCurzon, 2003 . Okuda H. Comment on “Ten Years After the Financial Crisis in Thailand: what Has Been Learned or Not Learned” Asian Economic Policy Review 2(1) (2007):100-118. Okuda H., Rungsomboon S. Comparative cost study of foreign and Thai domestic banks 1990-2002: Estimating cost functions of the Thai banking industry. Journal of Asian Economics 17 (4) (2006): 714-737. Siamwalla, A. “Picking Up the Pieces: Bank and Corporate Restructuring in Post-1997 Thailand”, Paper Presented at the Sub regional Seminar on Financial and Corporate Sectors Restructuring in East and South-East Asia, Seoul, Korea, 30May-1June 2001. ________________.“Anatomy of the Thai Economic Crisis” In Thailand Beyond the Crisis Edited by Peter Warr, 66-104. London, RoutledgeCurzon, 2005.
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U.S. Library of Congress Vichyanond, P. “The Evolution of Thailand’s Financial System: Future Trends” TDRI Quarterly Review.Vol.10 No. 3 (September 1995): 16-20. Vanikkul, K. “Thailand Experience of Banking and Financial Sector Reform After the Crisis,” Bank of Thailand, 2007. Wibulswasdi C. and O. Tanvanich. “Liberalization of the Foreign Exchange Market: Thailand’s Experience.” Bank of Thailand Quarterly Bulletin. Vol. 32 No.4 (1992): 25-37. Wibulswasdi C. “The Formulation and Implementation of the Monetary Policy: The Thai Monetary Experience during 1983-1984.” Bank of Thailand Quarterly Bulletin. Vol.26 No.3, (1986): 27-44. ___________ .“Thai Experience in Economic Management during 1980-87.” Bank of Thailand Quarterly Bulletin. Vol.27 No. 3 (1987): 31-46. ____________. “Strengthening the Domestic Financial System.” Paper on Policy Analysis and Assessment, Economic Research Department, Bank of Thailand (1995): 1-12. Zhang, X. The Changing Politics of Finance in Korea and Thailand: From deregulation to debacle. London: Routledge, 2003. Appendix I
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Table 1 Financial Sector Reforms Objective Reform Measures Taken
A. Enable sharing of credit information among financial institutions
Measure to be taken in 2009 • A national credit-scoring system is planned. The National Credit Bureau (NCB) plans to implement a national credit-scoring system in terms of individual credit information early next year. The Credit Information Business Act has been effective since February 14, 2008. The bill allows the agency to set up a credit-scoring system which will benefit the credit analysis of financial institutions. Under this credit-scoring system, the borrowers would be classified with credit scores ranging from 300 to 900 points. The score below 700 points is considered to be quite negative while the score over 700 points represents a relatively healthy figure.
B. Formulate and implement a medium-term strategy for Thai financial sector
Measure to be taken in 2009 • The Financial Sector Master Plan (FSMP) Phase II is expected next year. The second phase of the FSMP, which expected to be implemented in 2009, aims to reduce operating costs of financial institutions; increase competition among financial institutions and non-bank entities through expanding the business scope permitted banks and greater foreign participation; and improve market architecture with the development of limited deposit insurance and greater variety in risk-management instruments. The new plan allows greater competition in the banking industry. The plan would strengthen the banking system by lowering the NPL ratio to less than 2% in 5 years (2013). Lower NPLs would improve the banks’ efficiency to generate more income and reduce costs due to the declining burden from provision.
C. Transition from the current blanket government guarantee on deposits to a limited deposit insurance scheme
Measure to be taken, but delayed • Customer Deposit Protection Scheme is effective with extended full protection period. The Deposit Protection Act (DPA) has been enacted and effective on August 11, 2008.Due to the recent global financial crisis, the full government guarantee period has been extended until 10 August 2011 instead of 2009 as per the approved Draft Royal Decree on Extension Bank Deposit Guarantee Act. After the 100% protection period, the protection limit will be reduced to BT 50 million and BT 1 million per person per financial institution on 11 August 2011 and 2012 respectively.
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Objective Reform Measures Taken
D. Remove legal impediments and provide an enabling environment for derivative products.
Measure taken over last 6 months of 2008 • Thailand Futures Exchange PCL (TFEX) was success in increasing its members but missed the volume target. In 2008, there are total 11 securities firm became new member of the Thailand Futures Exchange PCL (TFEX) as planned. However, the planned target of the total turn over of 10,000 derivatives trading is not achieved due to the recent global financial turmoil. (currently, the average daily turnover for Jan – Nov 2008 is 8,625 contract)
E. Development the domestic financial markets, including bond, capital, and money markets
(1) Domestic financial markets
Measure taken over last 6 months of 2008 • The approved Financial Institution Business Act (FIBA) facilitates the increase in foreign ownership in Thai financial institutions. This bill became effective on 3 August 2008 as planned. The FIBA allows financial institutions to raise the foreign limit from 25% to 49% with permission from the BOT and foreign investors may own more than 49% equity stake in Thai banks with permission from the Ministry of Finance and recommendation by the BOT. The increase in foreign limit would encourage Thai banks to seek foreign strategic partners to strengthen the capital base, improve core banking business, IT platform, know-how and add inorganic growth to Thai banks.
(2) Capital market Measure taken over last 6 months of 2008 • The Demutualization of the Stock Exchange of Thailand (SET) was approved for implementation in 2009.The SET’s Board of Governors approved the Demutualization of the SET group in principal. The new structure consists of 2 major groups: (1) the Stock Exchange of Thailand (SET) focusing on the capital market functions and (2) the Capital Market Development Fund (CMDF) focusing on long-term capital development such as investor education. Under this initiative, SET will become a listed company on the Exchange by 2011, by which time it will have achieved its 5-year strategic targets including doubling capitalization of the cash equity market and its revenue by 2013 – with 25% of this income coming from new products. In addition the Exchange will increase foreign listings to not less than 5% of total market capitalization.
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Objective Reform Measures Taken
• The SET installed new Trading System to facilitate future growth. The SET has introduced the Advanced Resilient Matching System (ARMS) to replace its older trading program, Automated System for the Stock Exchange of Thailand (ASSET). The new ARMS system will manage increasing trade volumes and new financial products and support the planned ASEAN Linkage project. • New Index Series was introduced in addition to current SET Index Series. The SET launched FTSE SET Index Series in addition to the existing SET Index Series. The new series consists of six separate indices: (1) FTSE SET Large Cap, (2) FTSE SET Mid Cap, (3) FTSE SET Small Cap, (4) FTSE SET Mid/Small Cap, (5) FTSE SET All-Share and (6) FTSE SET Fledgling. The Index is a benchmark index for portfolio management and for measuring the performance of listed companies in the Thai stock market. This index series uses February 29, 2008 as its base date, starting at 1,000 points. Index constituents will be reviewed in June and December each year by the index advisory committee. • The SET adjusted the price spreads. The SET adjusted the price spreads to eight from 10 intervals and narrow the interval for stocks worth over BT 50 to reduce costs for investors, while boosting trading liquidity. This is part of SET’s strategy to build competitiveness by helping investors to reduce trading costs. • The SET expanded its products range. SET launched the first exchange-traded fund (ETF) tracking the rate of return of the Stock Exchange of Thailand (SET) Energy and Utility Sector Index into the Unit Trust group. • The cabinet approved some measures to support the stock market during the existing financial crisis. The cabinet approved the Matching Fund arrangement and the increase in tax allowance limit. The Matching Fund aims to invest in SET market in order to support the stock market if foreign investors continue to repatriate their investment back. The tax allowance limit for investment in the Retirement Mutual Fund (RMF) and Long Term Fund (LTF) has been increased from BT 500,000 to BT 700,000. • The cabinet approved the schemes for Grassroots Economy to curb with current financial turmoil. The cabinet approved in principle of direct funding schemes for grassroots people and grassroots economy.
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Objective Reform Measures Taken
(3) Bond market Measure taken over last 6 months of 2008 • The SET has approved the reduction in the transaction costs of the Bond Trading. The SET terminated the listing fee for bonds to promote bond listing on the local market. In addition, the SET also extended the waiver of trading fees for bond of 0.005% on trading value in order to boost bond trade and lower costs.
Source: Anantavrasilpa Ratchada, Thailand Economic Monitor December 2008 World Bank Office - Bangkok
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Table 2: Commercial banks’ interest spread Year MLR Deposit Rate Spread
Dec-80 16.50 12.00 4.50
Dec-81 17.00 13.00 4.00
Dec-82 16.00 13.00 3.00
Dec-83 16.50 13.00 3.50
Dec-84 16.50 12.50 4.00
Dec-85 15.50 11.00 4.50
Dec-86 12.00 7.25 4.75
Dec-87 11.50 7.25 4.25
Dec-88 12.00 9.50 2.50
Dec-89 12.50 9.50 3.00
Dec-90 16.25 15.50 0.75
Dec-91 14.00 10.50 3.50
Dec-92 11.50 8.50 3.00
Dec-93 10.50 7.00 3.50
Dec-94 11.75 10.25 1.50
Dec-95 13.75 11.00 2.75
Dec-96 13.25 9.25 4.00
Dec-97 15.25 13.00 2.25
Dec-98 12.00 6.00 6.00
Dec-99 8.50 4.25 4.25
Dec-00 8.25 3.50 4.75
Dec-01 7.50 3.00 4.50
Dec-02 7.00 2.00 5.00
Dec-03 5.75 1.00 4.75
Dec-04 5.75 1.00 4.75
Dec-05 7.13 3.50 3.63
Dec-06 8.00 5.00 3.00
Dec-07 6.75 2.38 4.37 Source: Bank of Thailand
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Table 3: International Banking Facilities (IBF's) Credits (Millions of Baht)
End of Period
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Sep 1/
1. Out-In 197,024.4 456,643.0 680,517.2 807,633.2 1,411,362.9 767,029.4 487,123.1 386,980.3 276,947.6 208,772.5 166,468.0 153,183.9 60,302.0 n.a.
% 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 n.a.
2. Thai Banks 126,690.9 189,826.3 254,561.8 330,040.2 514,058.1 213,504.1 100,106.4 62,227.2 34,588.1 29,438.7 28,317.1 27,128.3 18,318.5 n.a.
% 64.30 41.57 37.41 40.87 36.42 27.84 20.55 16.08 12.49 14.10 17.01 17.71 30.38 n.a.
3. Foreign Banks with Full Branch(es) in Thailand
50,768.1 102,249.1 152,370.9 222,794.9 690,449.9 431,931.1 304,249.4 253,050.4 194,828.1 157,609.8 120,638.2 110,725.0 41,983.5 n.a.
% 25.77 22.39 22.39 27.59 48.92 56.31 62.46 65.39 70.35 75.49 72.47 72.28 69.62 n.a.
4. Other BIBF Units
19,565.4 164,567.6 273,584.5 254,798.1 206,854.9 121,594.2 82,767.3 71,702.7 47,531.4 21,724.0 17,512.7 15,330.6 n.a. n.a.
% 9.93 36.04 40.20 31.55 14.66 15.85 16.99 18.53 17.16 10.41 10.52 10.01 0.00 n.a.
5.Out-Out 3,789.2 100,833.2 517,044.5 482,558.5 471,081.7 148,493.7 63,682.9 44,132.0 32,477.8 34,236.0 32,623.9 29,227.6 16,663.7 n.a.
% 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 n.a.
6. Thai Banks 2,563.2 11,587.5 10,818.3 16,318.0 35,363.0 28,982.1 20,068.4 15,065.1 11,153.5 16,136.4 13,890.7 13,125.3 8,246.5 n.a.
% 67.64 11.49 2.09 3.38 7.51 19.52 31.51 34.14 34.34 47.13 42.58 44.91 49.49 n.a.
7. Foreign Banks with Full Branch(es) in Thailand
348.2 1,996.3 4,847.8 9,363.3 264,348.3 89,131.7 33,466.4 23,289.4 17,742.4 16,000.8 16,829.6 14,287.7 8,417.2 n.a.
% 9.19 1.98 0.94 1.94 56.12 60.02 52.55 52.77 54.63 46.74 51.59 48.88 50.51 n.a.
8. Other BIBF Units
877.8 87,249.4 501,378.4 456,877.2 171,370.4 30,379.9 10,148.1 5,777.5 3,581.9 2,098.8 1,903.6 1,814.7 n.a. n.a.
% 23.17 86.53 96.97 94.68 36.38 20.46 15.94 13.09 11.03 6.13 5.83 6.21 0.00 n.a.
9.Total 200,813.6 557,476.2 1,197,561.7 1,290,191.7 1,882,444.6 915,523.1 550,806.0 431,112.3 309,425.4 243,008.5 199,091.9 182,411.5 76,965.7 n.a.
% 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 n.a.
10. Thai Banks 129,254.1 201,413.8 265,380.1 346,358.2 549,421.1 242,486.2 120,174.8 77,292.3 45,741.6 45,575.1 42,207.8 40,253.5 26,565.0 n.a.
% 64.37 36.13 22.16 26.85 29.19 26.49 21.82 17.93 14.78 18.75 21.20 22.07 34.52 n.a.
11. Foreign Banks with Full Branch(es) in Thailand
51,116.3 104,245.4 157,218.7 232,158.2 954,798.2 521,062.8 337,715.8 276,339.8 212,570.5 173,610.6 137,467.8 125,012.7 50,400.7 n.a.
% 25.45 18.70 13.13 17.99 50.72 56.91 61.31 64.10 68.70 71.44 69.05 68.53 65.48 n.a.
12. Other BIBF Units
20,443.2 251,817.0 774,962.9 711,675.3 378,225.3 151,974.1 92,915.4 77,480.2 51,113.3 23,822.8 19,416.3 17,145.3 n.a. n.a.
% 10.18 45.17 64.71 55.16 20.09 16.60 16.87 17.97 16.52 9.80 9.75 9.40 0.0 n.a.
Source: Bank of Thailand 1/ According to One Presence Policy, Commercial banks registered in Thailand and Foreign bank branches returned IBF licenses to Ministry of Finance.