Thais won't practise safe banking

The Thai slang for a condom is a Mechai, in honour of social campaigner Mechai Viravaidya, a charismatic figure who was called in by the central bank last year to rescue Thailand's largest bank, the ailing Krung Thai Bank. Critics said he had no experience of banking, only of managing not-for-profit organisations - but then with a half-year loss of Bt23 billion ($620 million) this year, Krung Thai Bank arguably falls into the latter category anyway.

Mr Condom, as he is affectionately known, is the son of a Scottish doctor and a Thai father, and a man of many talents - chairman of numerous companies, on the boards of a lengthy list of NGOs, well-respected in Bangkok high society, one-time government minister and a champion of causes from birth control to forests. As head of the country's Population & Community Development Agency he is credited with almost single-handedly halving the birth rate in Thailand.

But the bubble burst when the colourful social activist, also known as Mr Rainbow, took on a chairmanship too far as head of majority state-owned Krung Thai Bank a year ago. The man who has set up schemes to enable farmers to repay loans by planting trees and proposed a fund to buy into listed companies in order to ensure good corporate governance, envisaged turning the lumbering monolith into a "people's bank", targeting the ranks of bicycle and motorcycle-owning country folk, rather than the Mercedes-driving yuppies of Bangkok.

He scrapped the executive car parks and lifts at Krung Thai head office, introduced a communal staff and directors' canteen and called in PriceWaterhouseCoopers to take a closer look at non-performing loans, which were said to have hit 80% of total loans at their peak.

Not surprisingly, he upset a few people along the way, not least finance minister Tarrin Nimmanahaeminda, and by August he and eight of his nine fellow board members, including Tarrin's brother Sirin, who was formerly president of the bank, were forced to resign when PWC's controversial report was leaked to a senate sub-committee before it was fully completed. Mechai was replaced by Stock Exchange of Thailand president Singh Tangtasawas.

The PWC report criticized standards of credit analysis at the bank: a charge the bank refuted, claiming it had credit standards and rules and was in the process of upgrading them. Non-performing loans were a problem systemic to the economy, and no worse than in other financial institutions, it maintained. "Mechai got into trouble because of the leaked information, which naturally the politicians would prefer not to be in the public domain. He was not fired for mismanagement, he was fired for letting the cat out of the bag," says a foreign banking analyst, who diplomatically prefers to remain anonymous. "When all this burst into the public consciousness the issue was the PWC audit and the discrepancies that it gave rise to between the published and underlying state of affairs. At that stage a lot of people in the outside world panicked a bit, seeing it as an action replay of Bangkok Bank of Commerce (BBC).

"But there was a big difference. Both had been mismanaged on a fairly large scale, but at BBC there were a relatively small number of people responsible and it was fairly straightforward to expose them. At KTB all the governing parties had representatives in positions of responsibility." He adds: "It was a financial dustbin for failed projects. It's no wonder the balance sheet is in a mess."

What's worrying foreign investors in and creditors to the Thai banking system is that KTB had supposedly already gone through a recapitalization and restructuring. Yet analysts in Bangkok believe that the bank was still insolvent, despite the two injections of capital by the government - Bt108 billion this year and Bt77 billion in December under an equity-for-debt swap by the central bank's Financial Institutions Development Fund.

Kasem Prunratanamala, head of research at BNP Prime Peregrine is slightly more optimistic. He says: "The finance ministry has realized it needs a new strategy in tackling NPLs." The ministry of finance and the Bank of Thailand have been in two opposing camps, with political wrangling making management of the bank difficult. Bringing Mechai into the fray may have served to confuse matters further. "That may have created the impression that its was a bank for the poor - that they could get free money from Krung Thai and not service their debt," he adds.

Krung Thai's NPLs, excluding those of Siam City Bank (SCIB) which it subsumed under a nationalization plan, were put at 59% by the bank, but once SCIB's problems are consolidated, the figures were estimated to be nearer 74% at the end of the second quarter.

The plan now is to siphon off the bad loans into an asset-management corporation under the central bank's Financial Institutions Development Fund, but the precise mechanism of that transfer has yet to be agreed, and pricing was proving to be a sticking point. The plan as it stands is to transfer all of SCIB's NPLs and most of Krung Thai's into the asset-management corporation, which will be 51% owned by the FIDF and 49% by Krung Thai Bank, thus enabling the bank to avoid consolidating those bad loans.

Crédit Lyonnais Securities Asia was hired to help with the "people's bank" restructuring plan, and to ensure the smooth merger of nationalized First Bangkok City Bank and the good assets of scandal-ridden Bangkok Bank of Commerce and bring the bank back to profitability. Krung Thai Bank has 18,000 employees and 654 branches following the nationalization mergers, making it the largest bank in Thailand

Another analyst suggests the asset-management corporation will be paying something like four times the real value of the loans it takes on, effectively injecting an estimated Bt100 billion in additional capital, and the bank could still be struggling.

But Kasem at BNP is less pessimistic, saying: "If Krung Thai does not have to put aside full provisions it will not need more capital." Gill Baker