'Little impact' from reserve requirement
A Bank of Thailand (BOT) plan to require commercial banks to hold 6 per cent of the proceeds from bills of exchange (B/E) in reserve would not have a significant impact on the industry, as Thai banks' reserves are already high, analysts say.
At present, banks are only required to hold a percentage (6 per cent) of conventional deposits in reserve, leaving them free to use 94 per cent of their deposits as loans. The planned B/E reserve requirement was prompted by concerns over a recent rapid increase in the number of the bills being issued, mostly to individual savers.
Local banks use bills of exchange as a financial instrument to secure a wider customer base and to increase their pool of deposits; unlike regular deposits, issuing banks are not subject to pay a 0.4-per-cent insurance premium on B/E.
An analyst at Kim Eng Securities (Thailand), however, said the Tisco Financial Group might be adversely affected by the move, because 75 per cent of its total capital is based on bills of exchange, the highest among commercial banks. However, the 6-per-cent reserve requirement should not significantly affect the liquidity of Tisco or other banks because all financial houses already have higher reserves than required.
An analyst said small and medium-sized banks had no choice but to get into the B/E market, as it was hard for them to compete with state-owned banks in terms of conventional deposit products.
An analyst at Finansia Syrus Securities said the central bank is sending signals - particularly to commercial banks - that it wants to cool the fiercely competitive B/E market.
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The broker at Finansia said the central bank wants commercial banks to reduce their issuances of B/E, as their ratios of such bills to total deposits has increased. At present, the ratio of B/E to deposits is 14-15 per cent, up from only 7 per cent in 2007.
The analyst at Finansia noted that if banks continue to chase capital through B/E deposits, the central bank might seek to tame the fierce competition by asking banks to pay a 0.4-per-cent insurance premium on them, as they do on other deposit products.
Apisak Tantivorawong, president of Krung Thai Bank (KTB), said that if B/E products require 0.4-per-cent payments, the bank would consider dropping the financial instrument, as the bank has no need to raise funds from this product.
"Banks offer B/E because they are not required to pay a percentage, as with deposit products, but if banks have to pay, B/E will be less interesting to KTB," he said.
Kris Chantanotoke, executive vice president of Bank of Ayudhya (BAY), agreed that B/E will be a less interesting product once banks have to pay a premium on them.
At BAY, B/E account for 10 per cent of total deposits. The banks' total deposits are expected to increase by the end of this year to Bt700 billion, up from Bt620 billion at the end of last year.
He said the central bank might also be concerned about the fairness of allowing commercial banks to use B/E to mobilise funds, while state-owned banks are limited to deposits.
A B/E reserve requirement would not impact the banking sector, because all banks currently have higher reserves than the projected requirement, he said.
Kris said the BOT might be concerned about retail customers who are not familiar with the difference between B/E and deposits. Because the BOT wants to ensure stability of liquidity in the banking system, he said, it needs to exert greater control over B/E.
He added that small banks, however, might be affected by the B/E reserve requirement as those with high B/E ratios face relatively higher costs than larger and state-owned banks.
