Financial markets / Financial institutions :Bills of Exchange

Overview

• Bills of exchange are an important avenue of capital mobilization in the private sector, especially for banks, which turned increasingly to them after the Bank of Thailand (BOT) granted permission for banks to issue them to the general public on 6 September 2006. Prior to that, banks were allowed to sell bills of exchange only to institutional investors. The initial 2006 announcement granting permission was replaced with a new announcement on 3 August 2008, to conform to the Financial Institutions Act of 2008. Major regulatory provisions were not altered.

• Bills of exchange have many advantages over deposits, including, for example, the fact that bills of exchange may be paid after deposits are paid in case the bank encounters financial troubles and must pay off accounts; the outstanding balance in bills of exchange need not be included in calculations of payments to the Deposit Protection Agency; and it is easier to manage liquidity with bills of exchange than with deposits since bills of exchange have a clearly specified withdrawal date and cannot be withdrawn early. In addition, interest rates and terms can be adjusted as appropriate to changing conditions more easily than they can when mobilizing funds through ordinary deposits. Beyond those considerations, the process of issuing bills of exchange is much simpler than that of issuing bonds. For example it is not necessary to secure authorization from stockholders or from the BOT or the SEC, and it is not necessary to establish a credit rating. The only requirement is to meet BOT conditions.

• Bills of exchange have advantages for investors as well. They give a higher rate of return than deposits, typically 0.25 to 0.50 percent above comparable fixed-term deposits. On the other hand, liquidity is lower for the investor since they cannot be withdrawn before maturity; neither are they transferable. Bills of exchange also carry more risk since they are not guaranteed by the state as are deposits.