Caution urged in BOT foray into soft rehab loans

“If [the soft loans] need to be provided, they must be done for really special cases with extreme caution, not for general cases,” Prasarn Trairatvorakul told a media briefing.
Last week, Finance Minister Thirachai Phuvanatnaranubala said his ministry was discussing with the central bank the possibility of providing credit at lower-than-market interest rates through commercial banks to flood-hit SMEs and families that need to make house repairs.
“If [the extension of soft loans] is to be done, a legal amendment is required,” Prasarn said.
The Bank of Thailand Act currently does not permit the central bank to engage in soft loans.
An explanation for the reasons and necessity for such soft loans is required, he said.
“Conditions must be carefully [set out]. There has to be a mechanism to build up confidence that [such soft loans] go only to those who are in real trouble,” such as flood-hit SMEs and people who genuinely need to renovate their homes, he said.
Financial institutions are expected to lend a hand on this issue if a reasonable explanation is provided, he said.
The financial markets are expected to understand this situation if the requested soft loans have transparent conditions with the amount limited and term specified.
The scheme could also put a financial burden on the BOT, instead of being part of fiscal measures for flood relief.
“The central bank has higher expenses than income. [If it extends the requested soft loans], it will need to shoulder the rate differential on its books,” Prasarn said.
The gap between the interest rate on the requested soft loans and the market rate should not be too great, otherwise it will increase the BOT’s burden to absorb liquidity in the financial system.
The central bank has already absorbed liquidity of about Bt4.6 trillion through market intervention, including bond purchases and foreign-exchange swaps.
“If we do something that is not good, the markets will give us warnings,” and that could include a visit by credit-rating agencies, he added.