In the past year, the Thai economy and the financial system, faced with many challenges arising from both domestic and global forces of change, have shown flexibility and resilience in adjusting to these changes and managing attendant risks. The strength and stability of the banking system in Thailand continued to improve with enhanced efficiency and risk management. This was supported by a stable, though moderating economic growth, and progress in structural reform that was underpinned by a risk-based supervisory framework and the implementation of the Financial Sector Master Plan. As a result, competition in the banking system has intensified, not only among peers, but also with non-banks and with direct financing via the capital market, inducing banks to step up their efforts to reap the economy of scale and scope, explore new forms of partnership and adapt their business model, including the deconstruction of business line.
Progress in structural development and modernization of the banking system has been aided by its continued profitability.
The banking system recorded profit for the fourth consecutive year. Non-performing loans declined to 8.3 percent and were cushioned by provisions and capital base in excess of regulatory requirement. The moderation in economic growth and uncertainty, especially from oil price, has contributed to the slowdown in overall credit growth. Nevertheless, credit to household sector, which constitutes less than a fifth of total loan portfolio, was still growing at a rapid rate. The Bank of Thailand has been closely monitoring this trend during recent years, and has introduced prudential measures not only to protect consumers, but also to safeguard economic and financial stability.
Looking ahead, the banking system will continue to face new challenges, both from global forces of change and domestic factors. These dynamic forces will require further strengthening of risk management, not just at the individual institutional level, but also at the systemic level through further strengthening of the risk-based supervisory framework supported by the enactment of the new Financial Institutions Business Act and the set up of a deposit insurance scheme. While we are on track with regard to Basel II preparation, with a quantitative impact study on capital to be rolled out by December 2006, much work remains to be done by both the industry and the authorities to ensure a smooth transition to Basel II in 2008. To further enhance the resilience of the Thai financial system, the authorities are committed to undertaking the Financial Sector Assessment Programme (FSAP) in 2007 with a view to comprehensively assess the strengths and weaknesses in the financial sector and set development priorities.
Continued improvement of banksû own internal risk management is the critical factor that will enable them to dynamically adjust to and better meet future challenges arising from increased economic uncertainty, intensifying competition, more demanding international standards and codes, and more complex risk profiles. At the same time, banks must also satisfy the increasing demand on their directors and senior executives to uphold their accountability to the public at large in addition to their responsibility to the shareholders.
The Bank of Thailand places highest importance on safeguarding economic and financial stability, and will continue to closely monitor signs of imbalances and take appropriate pre-emptive prudential measures with emphasis on sound risk management and corporate governance. Thus, the banking system should be well placed to meet the challenges from the rapidly changing environment.
M.R. Pridiyathorn Devakula
Governor,
Bank of Thailand
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