Author: Gill Baker Thailand has a huge number of debt restructuring cases and non-performing borrowers but they are steadily being dealt with. And the signs are that the authorities are starting to break the back of the problem, although there is still a long way to go.
In total some 282,000 companies were restructured, or were in the process of being restructured, in April and May alone, representing Bt2.286 trillion ($57 billion) of outstanding credit. Of those, 40,000 cases were pending completion, and that pile is growing by around 6,000 new cases a month, based on most recent figures, and work on sorting out the large defaulters is still only halfway through.
The Bank of Thailand is now confident that most outstanding “large” debt restructurings being overseen by the Corporate Debt Restructuring Advisory Committee (CDRAC) will be concluded by the end of the year. Richard Henderson, research director at Kim Eng Securities, believes most of the restructured loans are either high profile, or the easier, unilateral cases, leaving a combination of difficult and less high-profile ones to be tackled. “There is no evidence that the problem loans have been restructured properly or been accounted for properly,” he adds. “We are still very much in the dark as to what sort of loss we really are going to come up with.”
The central bank is awash with figures on the progress of the country’s debt work-outs, and of course there is good news and bad news. The banking system has been averaging around 14,000 completed debt restructurings a month so far this year, amounting to some Bt76 billion a month. And the completed arrangements are outstripping the number of new restructuring cases coming onto lenders’ books, which now account for Bt836 billion of outstanding credit. That value of restructurings in progress actually fell by almost 6% in May, despite the rise in case numbers.
CDRAC was set up by the central bank two years ago and provides a framework for workouts involving mainly large debtors with multiple creditors. At the end of June it had 9,597 target cases on its books, with outstanding credit of Bt2.58 trillion. Just under a third of those were classified as “large” and accounted for 89% of the outstanding credit. Around half the total target cases have completed restructuring, representing Bt964 billion in monetary terms.
Andrew Stotz, banking analyst at SG Asia Credit Securities, said it was unfair to question the efficiency of how Thailand was tackling its non-performing loans and restructuring because of the limited resources available. “Ultimately, if they do everything right it would cost a lot more money and Thailand cannot get the money necessary to more aggressively deal with NPLs. We have to consider the reality of the situation before we apply a pat remedy.” If banks pursue NPLs any more aggressively, the burden on the public, or the government, to provide additional capital will be too great. “Regulatory forbearance is a critical issue that has to be done.”
Another approach is for the bank to “grow out” of the NPLs by increasing new lending, but Stotz’s analysis indicates that the small and medium-size companies that are the stronger businesses are under-leveraged and inclined to stay that way.
Thailand’s progress in restructuring was highlighted by the IMF at a July executive board meeting, at which first deputy managing director Stanley Fischer said: “In the financial sector, a continuing decline in non-performing loans was evidence that Thailand’s market-based approach to corporate debt restructuring was working.”
“Even so, directors thought that more rapid progress in this area was very clearly needed. They welcomed plans to strengthen the court process and increase the number of judges, and to facilitate out-of-court settlements with the help of mediators.”
“Directors also placed considerable emphasis on pressing ahead with the restructuring of state-owned banks, which account for more than half of system-wide non-performing loans.”
Indeed, state-owned banks recorded Bt696 billion of NPLs in May, representing 58% of their total loans and around half of the system-wide NPLs, classified as over three months past due.
Thai private banks had Bt825 billion of NPLs, or around 28% of their portfolio, while foreign banks with full branches had Bt44 billion of NPLs, which represented just 6.8% of their total loans.
In total, Thailand had Bt1.9 trillion of NPLs in May, which accounted for 35% of total outstandings.
The headline figures can be misleading, though. New NPLs coming onto the banks’ books rose 48% from the previous month, albeit that April’s figure was a 51% drop on the March number. Foreign bank branches reported a hefty increase in May, from Bt724 million to Bt2.9 billion.
Henderson uses NPLs plus restructured loans as his working definition of problem loans, but he is concerned at the lack of information on loans that have been restructured more than once.
“So far the new loans that have been restructured twice or more frequently is fairly trivial, but it is going to be an issue in future years, particularly for some of the early grace periods which are running out in the next year or so,” he says.
Thai Farmers Research Centre has dismissed Bank of Thailand best-case scenarios of 7.4% NPLs by the end of the year, reckoning an 18% level was nearer the mark, but commented: “The [7.4%] projection… at least indicates a forward-looking attitude and strong commitment on the part of the government to address the chronic NPL problems among the local financial institutions. All essential conditions and difficulties should be increasingly recognized and addressed, which, in turn, will expedite the alleviation of these heavy burdens.”
On the positive side, Henderson reckons banks are about halfway through the recapitalization exercises necessary to absorb the problems, and assuming continued write-offs and absorption of further loans by the state, NPL levels could be down to 10% by the end of the year.
