Financial markets/Financial institutions :Finance Companies

Overview

• Finance companies are regulated by the Bank of Thailand (BOT) as specified in the Finance, Securities, and Credit Foncier Businesses Act of 1979. Previously, raising capital was limited to promissory notes; however, the BOT now permits finance companies to accept deposits, issuing passbooks, deposit slips or certificates of deposit, but does not allow them to open branches. Previously they were allowed only a main office, now they may open loan offices in other provinces. Thus capital accumulation is limited and clustered around only a few large customers, resulting in high capital mobilization costs, both in terms of raising capital and making loans, relative to those of the banks. The customer base of borrowers may then be those who cannot get a bank loan and who are willing to pay higher interest rates. That, in turn, increases the risks for finance companies above the levels for banks, with the exception of small loans, mostly for automobile purchases, since in the past, banks were not permitted to make personal automobile loans.

• In the past, most large finance companies were authorized to conduct both financing and securities activities under the same name. The BOT later required these activities to be separated since they have starkly different objectives. The finance business takes deposits and makes loans while the securities business deals in securities trading, acting as brokerages and financial consultants. Securities firms are registered on the securities market. Separating these lines of business removed a conflict of interest that created problems in the money and stock markets: some firms were utilizing funds from deposits to make loans to purchase securities. Following the separation of the securities from the financing business, finance companies' principle source of income was from automobile loans. That business was protected by the BOT in that banks were not permitted to make such loans until 2004. Thus the multi-billion baht automobile loan business was bound to the finance companies, and those companies earned a good profit as they charged interest at a flat rate higher than the banks' rate for smaller customers (Minimum Retail Rate), while risk was limited due to the collateral. After banks were permitted to make automobile loans in the same way, they, including the finance companies that had become banks, went after the automotive-loan market, leading to increasingly intense competition and interest rates falling below the banks' rate for larger customers (Minimum Loan Rate).

• Before the financial crisis of 1997 there were 100 finance companies in Thailand. Following the crisis, 56 of them had closed. The government implemented policies to introduce more rigor into the financing business. Finance companies were strongly urged to convert themselves to restricted banks from 1999 to 2002, prior to implementing the One Presence Financial Institution Policy master plan in 2004. Restricted banks then had the opportunity to become full-service banks. As a result of these policies, many financial institutions merged to become banks and restricted banks, reducing the number of finance companies and their activities. The BOT, thus, cancelled data reporting on finance companies since December 2009 after Finansa has been shut down reducing the number of finance companies to very few companies.