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10 Jun 2005

Financial Markets

Financial Sector Master Plan: Progress and Interesting Points


Since the Ministry of Finance and the Bank of Thailand (BOT) announced the Financial Sector Master Plan in early 2004, financial institutions have begun to adjust their business strategies in earnest. Many financial institutions have merged with others to upgrade their status. So far, ten financial institutions have been granted approval for upgraded status. It is expected that, eventually, private entities in the financial institution system (under BOT supervision) will comprise only four groups, i.e., universal, retail and subsidiary banks, plus full branches of foreign institutions. Meanwhile, finance companies, credit fonciers and stand-alone BIBFs may gradually fade away from the market.

In commercial banking business, the retail loan market is expected to receive considerable interest from new commercial banks (which have been upgraded from finance firms and credit fonciers), as well as from financial institutions whose upgrade applications were not approved, non-banks and existing commercial banks, because of the attractive rate of returns in such business. However, price competition in the retail loan market is poised to become more intense in the midst of a rising number of rivals. As a result, margins in this market may get smaller. This can be seen from the falling profitability of finance firms (mainly into consumer loans) that has been seen since 2004 through to the first quarter of this year.

Apart from the issue of intense competition, financial institutions under the new financial master plan will have to face the test of higher economic volatility, particularly as economic growth in the first quarter came out lower than forecast. Consumer confidence is still deteriorating steadily and spending for expensive items such as automobiles is clearly slowing; these factors will also affect the growth of consumer loans and corporate loans that are closely related to domestic consumption.

In this situation, it is expected that commercial banks that have better diversification in their loan portfolios and more efficient risk management will weather this volatile business cycle more easily. Although the current economic slowdown may not cause such damage as the reduction in the number of surviving financial institutions that occurred in the economic crisis of 1997, there is still no indication whether the newly formed financial institutions will be competitive in the long term, as long as there is still no support from an efficient legal structure. This is particularly true given the failed effort toward the Financial Institution Business Bill, previously. Meanwhile, it is forecast that past mergers of financial institutions may not be the only ones to come, due to real rivalry from foreign financial institutions entering the market in the future, amidst the advent of the liberalization of financial business.

Financial Markets