Banking Industry in Thailand
Essay Preview: Banking Industry in Thailand
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The banking sector comprises commercial banks, restricted licensed
banks, and International Banking Facilities (IBFs).
The current banking system in Thailand consists of the following components:
A central bank, namely the Bank of Thailand (BOT)
Commercial banks
International banking facilities (IBF)
4 Specialize financial institutions which are the Government Saving Bank (GSB), the Bank of Agriculture and Agricultural Cooperatives (BAAC), the Government Housing Bank (GSB) and the Export-Import Bank of Thailand (EXIM Bank)
Note that there is an overlap between the commercial banks and IBFs. Among the 27 IBF licenses, 8 are currently held by domestic commercial banks, 15 by foreign commercial banks. Other financial institutions include credit foncier companies, financial companies and securities companies (Bank of Thailand, 2005). Central to the economic crisis during 1997 are the central bank and commercial banks. We will now explore these financial institutions in a more specific way.
Banking Sector
The Central Bank
Thai National Banking Bureau, established in 1939, was the first organization assuming the responsibilities of a central bank in Thailand. It was a department attached to the Ministry of Finance. During the Second World War, the Thai government saw the success that other countries were experiencing from a strong central banking system. As a result, the Bureau was turned into a central bank, i.e. the Bank of Thailand, with the passing of the Bank of Thailand Act in 1942.
The Bank of Thailand has been given many responsibilities, including the following:
Formulate and recommend monetary policy to the Thai Government
Provide banking services to the government, state enterprises, and financial institutions,
Oversee financial institutions and their support of economic development,
Supervise and develop the financial systems,
Promote the economic sectors with priority,
Print and issue bank notes,
Manage Thailands international reserves,
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Represent Thailand during international meetings and keep good relations with other central banks,
Provide and distribute information on the economic condition of Thailand both within the country and abroad,
Act as the lender of last resort to other banks
Nevertheless, the Bank still has some limitations in powers. It is not responsible for the development of a capital market, and it has little control over short-term credit (Blanchard, 1958).
The central bank regulates Thai financial institutions by two tools: onsite and offsite supervisory methods. On-site methods are unannounced physical inspections conducted at least once a year for each Thai registered commercial bank. Off-site methods require all financial institutions to submit weekly, monthly, or annually reports over every area of operations. It also placed strong emphasis on preserving financial stability. Each bank or finance company must continually maintain liquid assets amounting to at least 7 percent of its total deposits (Supervision Group Policy, Bank of Thailand, 2002).
Currently, the Bank of Thailand has 4 regional branches, which perform central banking activities in there locality. The North Eastern Region Office is located in Khon Kaen, the Southern Region Office is located in Songkhla, while the Northern Region Offices are located in Chiang Mai and Lampang (Sunsite Thailand, 2005).
Commercial Banks
There are total 31 banks operating in Thailand, of which 13 are locally established banks and mergers between foreign and Thai commercial banks, and 18 are branches of foreign banks Commercial banks dominate Thailands financial sector by holding 73% of both household savings and credits extended by all financial institution (Elgar, 2003). All commercial banks are established under the Commercial Banking Act B.E. 2505 (1962) amended in 1979, 1992, 1997, and 1998.and the Act authorizes the Ministry of Finance (MOF) and the BOT to issue regulatory guidelines on the type of business, prudential requirements, and reporting standards, etc. applicable to commercial banks.
For instance, they must meet minimum capital requirements in order to be incorporated and they must transfer at least 15% of their profits into reserves, and dividends are limited to 15% of reserves until the amount of reserves exceeds 60% of their paid-in capital. Moreover, they are required to maintain a capital adequacy of approximately 10% to the two tiered capital standard set by the Basle Committee in the 1988 Capital Accord (Traisorat, 2000).
The major business areas of commercial banks include taking time, saving and current deposits, issuing certificates of deposit, securing domestic and foreign loan, lending, buying and selling of foreign exchanges, as well as trading bills of exchange and tradable financial securities. While the concept of universal banking does not yet popular in Thailand, commercial banks may engage in a number of other banking-related businesses, for examples, foreign exchange business and non-equity related investment banking activities such as financial consulting services.
Commercial banks normally provide credit in the form of overdrafts that are on a short-term basis but also may be in term of year. Due to fluctuations in interest rates both in the international and domestic markets, commercial banks at present encourage customers to utilize term loans instead of overdrafts.
Recently, some commercial banks