Financial markets / Financial institutions : International Banking Facility

Overview

• A year after the IBFs went into operation, the BOT implemented the third phase of currency exchange relaxation in pursuit of making Thailand a regional financial center, while also giving full support to IBF loans, luring foreign banks with the possibility of opening additional branches and of transforming new foreign (stand-alone) IBFs into full-service bank branches. These measures resulted in a rapid increase in outstanding IBF loan balances over the remainder of the year to 457 billion THB on December 31, 1994, an increase of 132 percent over the same period of the previous year, resulting in abnormally high levels of foreign debt and a significant drop in domestic deposits.

• In 1995, warning signs began to appear that the influx of foreign capital might cause problems for domestic economic and financial systems. In response, the conditions for elevating stand-alone IBFs to full-service bank branches and for the second round of stand-alone IBF approvals were altered to emphasize out-out transactions. At the same time, regulations began to be issued controlling the influx of short-term foreign capital, and foreign banks were required to maintain liquid assets of at least seven percent of IBF deposits. More stringent requirements were designated for IBF borrowers. For example, the minimum out-in loan was raised from 500 thousand to two million USD, borrowers without foreign currency income were required to insure against risks from changing exchange rates, and the methods for calculating the net foreign currency base were adjusted to take account of borrower risk. Nevertheless, the outstanding balance on out-in IBF loans rose to 681 billion THB, 49 percent higher than the previous year. The outstanding balance on out-out loans increased nearly five times from the previous year to 517 billion THB. Ninety-seven percent of the increase was in stand-alone IBF loans.

• In 1996, the BOT realized that the excessive influx of foreign capital might cause overheating in the Thai economy, and consequently implemented more stringent financial regulations, requiring that banks, IBF institutions and finance companies must maintain liquid assets at a level of at least seven percent of foreign deposits and loans of less than one year, and mandating strict ratios of loans to deposits for all financial institutions. All financial institutions, including IBFs were required to lower their domestic loan targets, lending only to low-risk clients and as was beneficial to the economy. Nevertheless, outstanding out-in loan balances continued to rise, reaching 808 billion THB by the end of 1996, though at a lower rate of 19 percent, while the outstanding balance on out-out loans declined seven percent to 482 billion THB after clarification of the regulations on elevating stand-alone IBFs to full-service bank branches.