OVERVIEW OF FINANCIAL SYSTEM IN THAILAND

A. Thai Financial Institutions: Problems and Remedial Measures in 1996/7

1. Introduction

Thailand embarked upon a major financial liberalisation program starting in 1990, with the aim to foster greater efficiency in financial Institution management, to prepare domestic institutions for greater competition and to pave the way for their expansion abroad.

Measures undertaken included the liberalisation fo exchange control, the lifting of interest rate ceilings, the relaxation of rules requiring financial institutions to buy government bonds as well as the opening of the financial market to foreign institutions.

In the years that followed, rapid economic growth led to vigorous expansion in the financial sector.  Commercial bank lending in 1990-1995 grew at average 25.05% per year.  The stable exchange rate also helped in attracting substantial capital inflow which led to the short term money market to be overly liquid.  Interbank rate at times was as low as 2-3% per annum.  The excessive capital inflow led to overactive investment in two sectors that are sensitive to interest rate, which were the sectors of real estate development and the stock market.  The inflow led to rapid price appreciation, which in turn induced speculation and yet more inflow.

The stress in the financial sector started to surface in 1996 when a medium size bank, the Bangkok Bank of Commerce, experienced difficulties. They were caused by losses arising out of fraudulent activities involving several take-over deals of companies in the stock market.

In 1996, the Ministry of Finance and the Bank of Thailand, therefore, issued various packages to resolve the problem.  The packages covered a wide range of measures aimed at resolving the immediate problems, as well as preventive measures to strengthen the system in the future.

Full Download >>