Money and Banking

Money and Banking

Thailand's performance in managing its money and banking affairs through successful development and diversification of its financial institutions was impressive in the 1960s and 1970s. However, economic imbalances in the early 1980s and the rising tendency of governmental intervention put the financial sector under stress, thus reducing its efficiency in resource mobilization and allocation. Efforts to remedy the economic imbalances in the Fifth Economic Development Plan included restructuring monetary, exchange rate, and interest rate policies; strengthening the open securities market; and encouraging competition among financial institutions.

Financial Institutions

Thailand had many types of financial institutions, subject to different laws and regulated by different agencies. Most of them were privately owned, but some were state owned. The primary state-owned facility was the Bank of Thailand, which had responsibility and authority for monetary control in its role as the central bank. It served as the fiscal agent and the financier of the government; regulated the money supply, foreign exchange, and the banking system; and also served as the lender of last resort to the banks. Other state-owned facilities included the Government Savings Bank, the Bank for Agriculture and Agricultural Cooperatives, the Industrial Finance Corporation of Thailand, the Government Housing Bank, and the Small Industry Finance Corporation of Thailand.

By the mid-1980s, the 30 commercial banks had 1,526 branches handling the majority of all financial transactions in Thailand. The 16 largest banks accounted for over 90 percent of assets, deposits, and loans of the commercial banks, indicating a high concentration and little competition in the banking industry. Moreover, despite the impressive growth of banks, entrance by new banks was limited.

Finance and security companies comprised the second largest group of financial institutions with assets equaling nearly 22 percent of those of commercial banks. Concentration also existed in the securities industry, the 5 largest companies (out of 112) holding 19 percent of all finance and security assets. The finance companies were created by many domestic and foreign banks to overcome banking restrictions. Although they were intended to increase competition with commercial banks, the objective was not met because many banks used the companies as an extension of their own activities.

Money and Capital Markets

The money and capital markets were still underdeveloped in the mid-1980s. One striking fact was that the money market was very rudimentary and there was practically no open market for short-term securities; the only investors in treasury bills and government bonds were commercial banks and a few other financial institutions, which had to hold them until maturity. Certificates of deposits did not exist, and, for all intents and purposes, promissory notes issued by the finance companies were nonnegotiable. In order to increase the liquidity aspect of government bonds, in April 1979 the Bank of Thailand established the government bond repurchase market. In reality this was only a brokerage window at the central bank for institutional investors and, therefore, did not help to achieve the desired objective of open-market operation. Thus, Thai interest rates were determined, to a significant degree, by international forces rather than central bank sales and purchases of government securities.

The Security Exchange of Thailand (SET) had combined the functions of securities market and securities commission, providing the legal framework for underwriting and trading of corporation shares of common stocks and bonds as well as government securities. In 1974 the SET assumed the functions of the Bangkok Stock Exchange, which never had been very active. In 1976 the SET had an upsurge because of expansionary monetary policy. In 1978 the SET collapsed, however, because of massive speculation, easy margin finance of up to 70 percent of a transaction, unpreparedness and inexperience of the brokers as well as the investors, and inadequate regulation and supervision of the market and such activities as inside trading and manipulation. The government created at that time two special public funds to purchase securities in order to limit the negative effects of price swings in the SET. Many investors, however, held on to their investments that had declined in value in order to wait for a better price, thus decreasing normal stock market activity. The hesitation to trade in the market created a surplus problem for the SET, further damaging investor confidence. Some economists suggested that more specific regulations and supervisory systems were needed in order to revive the SET and restore public confidence.

Rural Finance

Beginning in the late 1960s, the government gave top priority to increasing credit availability to the agricultural sector despite the fact that agricultural performance had been excellent during the previous two decades. The emphasis was on providing credit to agriculture at below market interest rates and channeling credit to poor farmers. In 1975 the central bank imposed a mandatory credit allocation system, under which a required minimum of 5 percent of all outstanding bank loans were allocated to agriculture. This quota was increased to 7 percent, then 9 percent, and finally to 13 percent by the mid-1980s. Moreover, all new rural and provincial branches of banks were required to lend 60 percent of their local deposits in the area served by the branch, with one-third of that amount reserved for farmers.

In 1966 the government established the Bank for Agriculture and Agriculture Cooperatives to supply credit for the development of the agricultural sector. In the 1980s, it became the most important single source of credit for farmers, and it had a wide coverage of 62 branches and 514 field units located throughout the country; more than 2 million farm families were reached directly and indirectly via the cooperatives and farmers associations. Noninstitutional sources, such as agriculture and savings cooperatives, supplied 50 percent of agricultural credit, and commercial banks and the agricultural banks each supplied 25 percent. Finance for nonagricultural activities in the rural sector, which provided 50 percent of rural income, was largely neglected.

Industrial Finance

The government did not use a mandatory allocation system or interest controls to affect the distribution of credit among industrial subsectors or regions or classes of industrial borrowers. The interest rate ceiling, however, did limit credit availability to small and medium industrial firms. Therefore, most credit went to the larger firms, which were mainly engaged in import substitution and were concentrated in the Bangkok metropolitan area.

Commercial banks, finance companies, and the Industrial Finance Corporation of Thailand (IFCT) were the main suppliers of credit to the industrial sector. Commercial banks accounted for nearly 70 percent of the total credit granted to the manufacturing sector by the mid-1980s, the finance companies 24 percent, and IFCT the rest. Although the share of the IFCT was modest, it was the only one that offered extensive term-financing on a project basis. It was a private institution, but its mandate was to grant loans for projects having a low financial rate of return, which were unacceptable to commercial banks but were important to the economy as a whole. Such loans were possible because of the government guaranty for liquidity assistance to small borrowers and soft-term loans. The activities of the IFCT were hampered, however, by its being limited to fixed assets financing and by the lengthy project-evaluation procedure.

Finance companies tended to deal with smaller borrowers than did commercial banks in their lending to manufacturing firms because they were allowed to charge higher rates to offset the higher risk associated with smaller borrowers. Yet, because of the limited regional spread of their branch networks and their limited resources, they could not fill all the gaps left by commercial banks, such as the supply of long-term loans.

Commercial banks provided the widest range of services. Besides credit, they offered checking services, short-term trade credits, guarantees for third-party borrowing, foreign exchange services, and letters of credit. The breakdown of bank loan portfolios showed 19 percent for discount of trade bills, 58 percent for overdrafts, and 23 percent for loans. Because discounting and overdrafts were short-term activities, the 23- percent share for loans meant that long-term financing was scarce relative to short-term financing. Because fixed assets such as land and buildings represented the preferred collateral for banks, smaller borrowers with fewer fixed assets tended to be limited in their access to loans. Once a borrower had pledged its assets to banks for short-term financing, it could not use the assets for collateral with another institution, such as the IFCT, for long-term loans.

Monetary Policies

Monetary policy was traditionally passive. Control over the rate of credit extension was the primary means for supporting growth, maintaining price stability, and monitoring the balance of payments. Interest rates were allowed to adjust to the rate of credit expansion and were very much affected by international rates as a result of the Thai open economy. Low returns tended to discourage private savings and encourage high demand for consumer goods.

Domestic prices also were largely determined by world price movements as a result of the country's open economy and minimal domestic price controls. In fact the oil price increases in the early 1970s caused inflation to rise from 4.8 percent in 1972 to 24.3 percent in 1974. The deceleration of world prices in the early 1980s caused domestic inflation to decline from 13 percent in 1981 to 5 percent in 1982. Measuring by the price indexes, with 1972 as a base of 100, price increase was less for agricultural products, going from 130.2 in 1973 to 227.7 in 1983 compared with 115.7 to 276.3 for nonagricultural products. The highest increase among agricultural goods was for forest products, which went from 122.9 to 403.2 during the same period. Among nonagricultural goods, mining and quarrying showed the highest increases. The consumer price index, taking 1976 as the base of 100, showed the highest increase in transportation prices with 231.2 in 1982, while the rest of the consumption basket had an increase of about 180 between 1976 and 1982. The Bangkok metropolitan area had the highest increase with 194 in 1983, compared with 188.4 for the Northeast region, 181.6 for the Center, 180 for the North, and 178.4 for the South (these being Thailand's four geographic regions).

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