Overview (December 2000)

Introduction
Governing Laws
Post-Crisis Developments
New Legislation

Introduction

Since the de-linking of the baht to the US dollar on July 2 1997, there has been an ongoing process of law and regulatory reform to address four major problems that have resulted, including:

• depleted net international reserves;
  
  
• systemic problems in the financial sector;
  
  
• a serious liquidity shortage and an increasing number of non-performing loans; and
  
  
• regional economic turmoil.

This overview focuses on developments in the Thai legal and regulatory framework applicable to financial institutions, commercial banks and finance companies that dominate the financial market. Government banks, the Industrial Finance Corporation of Thailand, the Export-Import Bank of Thailand, Bangkok International Banking Facilities, Provincial International Banking Facilities, representative offices and other financial institutions are not discussed herein.

The following chart illustrates some of the changes in the banking sector since January 1 1997:

Governing Laws

Commercial banks and finance companies are subject to numerous regulations and notifications, and to two principal laws: (i) the Commercial Banking Act of 1962 (last amended by Emergency Decree Amending the Commercial Banking Act (No 4) of 1998), and (ii) the Act on the Operation of Finance, Securities and Credit Foncier Businesses of 1979 (last amended by Emergency Decree Amending the Act (No 5) of 1998).

The Bank of Thailand (BoT), in conjunction with the Ministry of Finance (MoF), is responsible for administering both of these acts, but its regulatory powers were limited and not vigorously exercised. It had to rely on the police to prosecute offences under the acts, who were not well-equipped for this task. The BoT has recently established an in-house prosecution division and charges are being filed regularly against former bank officers for offences under the Commercial Banking Act.

No more than 5% of the shares of a commercial bank, and 10% of the shares of a finance company, can be held by one person. Both acts limit foreign share ownership to 25% and require that 75% or more of the directors of a bank must be Thai nationals. Regulators may waive these requirements on shareholdings and have frequently done so during the past three years.

The Financial Institution Development Fund was established in 1985 under the Bank of Thailand Act as a juristic person with the task of restoring and developing the financial system so that it remains stable. All financial institutions contribute to the fund according to prescribed rates, and the BoT contributes additional funds as necessary. The fund made substantial cash advances to most Thai commercial banks and finance companies to enable them to deal with liquidity problems. In some cases, the fund has become the major shareholder of financial institutions through debt-equity swaps following intervention by the BoT.

Post-Crisis Developments

When the baht was de-linked from the US dollar, the exchange rate dropped from 25:1 to a low of 57:1 in January 1998. It gradually recovered (to a rate of approximately 38:1), but has since fallen to 44:1 (at the time of writing).

In August 1997 an International Monetary Fund (IMF) assistance programme was approved, providing a line of credit of $17.2 billion.(4) The government issued quarterly letters of intent according to IMF practices and then made these letters available to the public. Approximately $3.73 billion remained undrawn, when in June 2000, Thailand exited the IMF programme.

The government adopted two main strategies for restructuring the financial sector: (i) segregate viable and unviable financial institutions, and (ii) improve the regulation, supervision and operation of the remaining institutions.

Segregating financial institutions
The following measures have been taken to segregate viable financial institutions from those that are not viable:

• In October 1997 two institutions were established to assist in financial restructuring - the Financial Restructuring Authority (FRA) and the Asset Management Corporation (AMC).
  
  
• Fifty-six finance companies were put into liquidation under the FRA, which has conducted seven public auctions of core assets since June 25 1998. The AMC is the buyer of last resort for the remaining lowest quality assets.
  
  
• The Financial Institution Development Fund guaranteed the deposits and liabilities of the remaining financial institutions in order to restore public confidence (and thereby avoid a run on banks). These guarantees are to be phased into a self-financed and limited deposit insurance scheme.
  
  
• The Financial Institution Development Fund assumed almost 100% ownership of seven commercial banks and 12 finance companies.

Initiatives relating to remaining institutions
The government has taken the following measures in order to improve the regulation, and strengthen the supervision and operation, of the remaining institutions:

• Amendments were made to the Commercial Banking Act that give the BoT more supervisory independence and improve the procedures it must follow.
  
  
• The ceiling on foreign ownership in financial institutions has been relaxed. Majority foreign ownership is now allowed on a case-by-case basis for up to 10 years, following which foreigners will not be permitted to acquire new shares until their ownership is reduced to 49%.
  
  
• The BoT revised the rules on asset classification, reducing the recognition of accrued interest income to three months.
  
  
• The BoT announced new provisioning requirements that are in line with best international practices and are to be phased in by the end of December 2000.
  
  
• On August 14 1998 the MoF and BoT announced a package of capital support schemes to assist financial institutions in their recapitalization efforts.
  
  
• The MoF and BoT also announced on August 14 1998 a resolution strategy for the intervened banks and finance companies.
  
  
• In 1998 the BoT intervened in six commercial banks and 12 finance companies. These banks and financial companies were able to recapitalize within a BoT-prescribed timeframe by writing down registered capital, replacing management and injecting new capital through debt-to-equity swaps. The BoT intervened in a seventh commercial bank in July 1999.
  
  
• The BoT continues to encourage banks to set up their own asset management companies in order to speed up debt restructuring and reduce non-performing loans. As of December 1 2000 14 asset management companies have been established (10 established by nine commercial banks, and four by three other financial institutions).

New Legislation

Money laundering prevention
The Money Laundering Prevention and Suppression Act BE 2542 (1999) introduced transaction reporting requirements and came into force on October 27 2000.

The act defines 'money laundering' as transfer, acceptance of transfer, or transformation of property or cash derived from a predicate offence, in order to conceal its source or to assist others in connection with the predicate offence, or to do any act to conceal or disguise the true nature, acquisition, location, disposition or transfer of that property or cash.

A financial institution is required to report any transaction involving cash of Bt2 million or more, a transaction involving property valued at Bt5 million or more, or any suspicious transaction. The financial institution's client must then provide identification and facts in the specified form. Those giving advice on investment or movement of funds are also required to make a report to the authority in the case of a suspicious transaction.

The act established the Anti-Money Laundering Board chaired by the prime minister, and the Office of Anti-Money Laundering to implement the act. The act also set up the Business Transaction Committee, to examine and suspend transactions and properties involving money laundering.

Financial Institutions Bill
The Financial Institutions Bill(5) was drafted to modernize the regulatory framework. It will standardize the regulatory framework of banks, finance companies and credit fonciers. It will provide a legal basis for consolidated supervision of financial conglomerates. The bill includes regulations dealing with the following:

• insider lending;
  
  
• foreign exchange exposure;
  
  
• financial institutions' non-financial activities;
  
  
• the BoT's prompt corrective actions against troubled institutions;
  
  
• resolution of insolvent institutions;
  
  
• mergers and takeovers;
  
  
• disclosure standards; and
  
  
• penalties for, and prevention against, fraud.

Key aims of the draft bill include:

• to strengthen corporate governance at financial institutions by requiring higher qualifications for directors and senior management, by limiting credits made to directors and management, and by requiring regulatory approval for shareholdings in financial institutions above 10%;
  
  
• to strengthen government regulation by streamlining authority and by establishing clear rules and codes of practice, thereby limiting abuse of power and regulatory discretion;
  
  
• to establish new guidelines for financial groups on investment limits (including cross-shareholding limits);
  
  
• to establish strict capital adequacy rules;
  
  
• to increase the BoT's authority to oversee internal controls and risk management procedures at local institutions;
  
  
• to increase the BoT's authority to ensure that contracts with consumers are fair and that an adequate amount of information is disclosed to the public;
  
  
• to allow the BOT to order audits (of the parent company as well as its subsidiaries and affiliates) and to require independent auditors to report cases of fraud; and
  
  
• to allow the BOT to act as an injured party with the authority to file criminal actions in cases of fraud or other violations of law by financial institutions. Also, it is proposed that the definition of 'computer-related crimes' should be expanded.

Bank of Thailand Bill
The Bank of Thailand Bill aims to increase the BoT's independence in establishing monetary policy, including maintaining price stability and safeguarding the stability of the financial system. The BOT will also have more flexibility in managing international reserves and in taking measures to ensure a stable value of the baht.

According to press reports, important issues still under discussion include (i) the degree of independence of the BoT, and (ii) the grounds on which the governor of the BoT may be removed.

Draft legislation
Other draft laws have been prepared that will have importance for the banking community, including:

• amendments to the Currency Act;
  
  
• a Deposit Insurance Agency Law; and
  
  
• legislation to increase the types of assets to be subject to non-possessory security interests. The draft is based on Chapter 9 of the UCC in the United States and UK law on floating charges.

The last ordinary session of the new Senate and old House of Representatives adjourned on October 21 2000. The government announced the dissolution of the House of Representatives effective as of November 9 2000. The election of new members of the House of Representatives is scheduled for January 6 2001.

No new banking legislation will be enacted prior to the formation of the new government in early 2001.

For further information on this topic please contact Albert T Chandler at Chandler & Thong-ek by telephone (+662 226 6485) or by fax (+662 266 6483) or by e-mail ([email protected]).

Endnotes

(1) DBS Thai Danu, ABN-AMRO, Bank of Asia, Standard Chartered Nakornthon Bank and Radanasin Bank. The sale of Bangkok Metropolitan Bank to HSBC is still pending at the time of writing.

(2) BMB and Siam City Bank.

(3) On November 6 1996 the granting of seven new commercial banking licenses to foreign banks was approved. Six were opened in 1997, and one in 1998.

(4) Provided by the International Monetary Fund, Jexim, the World Bank, ADB, and the Central Banks of Australia, Canada, Hong Kong, Korea, Malaysia, China and Japan.

(5) Because the Financial Institutions Bill had been passed by the old House of Representatives, following the formation of the new government, it may be considered by the Senate. Such decision must be made by the Cabinet within 60 days, from the first day of the National Assembly after the general election. Otherwise, before any bill proposed by the government can be considered, it must be approved by the Cabinet, be reviewed by the Council of State and be introduced in the new House of Representatives.