(Source: Wichit Chantanusornsiri Bangkok Post, Thailand (MCT) — A government plan to suspend debt payments for farmers could have a significant impact on the liquidity and credit rating of the Bank for Agriculture and Agricultural Cooperatives (BAAC).
One former BAAC senior executive said up to 90% of the funds used by the state bank came from loan repayments, with the rest generated through investment activities.
Allowing customers to voluntarily suspend their principal payments with no restriction could have a massive impact on the bank’s finances.
Cabinet members this week approved a debt moratorium programme that will suspend principal repayments for borrowers from state banks for up to three years. Participants may suspend payments on loans of up to 500,000 baht per bank, and must have a clean credit record to participate. The programme will begin in September and run until August 2015.
The BAAC estimates that 2.9 million borrowers, accounting for 80% of its customer base, could qualify for the new measure. If all participate, the bank could lose up to 6 billion baht in income.
The programme mirrors in part an initiative launched over a decade ago, when the Thaksin Shinawatra government approved a three-year debt moratorium for farm borrowers.
Bank officials said the previous programme, limited to 100,000 baht in debt owed by problem borrowers, affected only 20% of BAAC’s customer base. For borrowers current on their loans, the BAAC instead offered interest rate reductions as an incentive. Participants in the debt moratorium programme however were restricted from taking out new loans with the bank.
“Despite the Thaksin debt moratorium programme being designed quite conservatively, the BAAC still had to do quite a bit of explaining to its counterparties, including the World Bank, who were concerned that the programme could force the bank to go bust,” said one official.
But current plans aim to expand the moratorium significantly, covering borrowers who have no problems in servicing debt. In addition to the moratorium on repayments, participating borrowers will also benefit from a three-percentage-point cut in their interest rates and be allowed to apply for new loans with few restrictions.
Sources said the Thaksin debt programme was quite cautious about potential moral hazards for the financial system. Participants were encouraged to take skills training programmes and savings initiatives by the bank.
Borrowers also were required to secure guarantees from their neighbours, a requirement aimed at encouraging communities to discipline themselves.
But the lack of conditions for the current programme will create a different mindset among participants, one banker warned.
“This programme will only foster the idea that the public doesn’t have to support themselves, but can turn to the government for assistance. Rather than encourage people to help support the growth of the country, we are making them burdens of the state,” he said.
“What is the point of using public funds to help people who can already pay their debt? These funds would be better used to fund research programmes or other projects that will help our agricultural sector better compete in the future.”
The BAAC, meanwhile, has reached an agreement with the Finance Ministry to increase its capital by 10 billion baht to 60 billion over a three-year period.
BAAC president Luck Vajananawat said the bank expects profits over the next several years to fall to 4.5-5 billion baht from 8 billion last year.
©2012 the Bangkok Post (Bangkok, Thailand)
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