Sunday, August 3, 2008

Thailand's bankers complain about new bank law


Local bankers are rushing to review their risk management and compliance functions as the new Financial Institutions Business Act formally takes effect today.

Many executives are privately fuming about the complexity of the new law, which intends to modernise the regulatory framework for the financial sector.

Related-party lending is a major complication under the law, which stipulates criminal penalties in many cases for violations.

"In practice, many of the rules will be very difficult to follow. The concept of related party covers a huge range of people, and the felony penalties and prospect for jail sentences for violations represent a massive risk for any bank," one banker said.

Section 48 of the law restricts bank lending to directors and senior executives, their spouses and underage children. This could include a home mortgage or personal loan to a bank executive.

Kannikar Chalitaporn, the president of Siam Commercial Bank, said it was even more alarming that loans to a corporate client could be undermined by the related party rule.

Loans to a client with a director or senior executive married to a bank executive would fall under the rule, potentially forcing the bank to either terminate the customer relationship or force the bank executive to quit.

Chaiwat Utaiwan, the president of Siam City Bank, said that while he understood the good intentions of the law, the Bank of Thailand needed to clarify many points to prevent disruptions of bank operations.

"We frankly don't have a good understanding of all the issues. For instance, Prasert Bunsumpun, the president and chief executive of PTT Plc, is an independent director of the bank," Mr Chaiwat said. "Mr Prasert does not have management authority at SCIB. But we're not certain whether we can offer loans to him."

The issue has massive implications for local banks, which have recruited prominent businessmen to their boards to help set strategy.

Single lending limits represent another sticking point. The new law caps lending at 5% of total capital or 25% of total outstanding loans to any single business group to help limit concentration risk.

The limit would certainly affect loans to large conglomerates such as PTT or Siam Cement Group. Many large firms are likely to turn more to the bond market as an alternative to bank loans as a result.

"Considering that many large companies have many subsidiaries, it will not be easy to follow the single lending rule in practice," a TMB executive said.

"We should see the bond market and equity market rise in importance as a funding source for businesses as a result."

Banthoon Lamsam, the chief executive officer at Kasikornbank, agreed that greater restrictions were inevitable.

"We certainly will become more prudent in operations considering the more complicated rules and stiffer penalties set out under the law," he said.

But Mr Banthoon said he was hopeful that the law, which expands the scope of businesses financial institutions can undertake, would help strengthen Thailand's financial system and bring greater stability overall.

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