Commercial banks to increase loan-loss provisions as shield for unforeseen crisis, central bank says
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Commercial banks plan to increase their loss provisions - monies set aside to cover bad loans - to 4 per cent of their lending balances from 3.2 per cent currently as they prepare to deal with any unexpected economic situation, according to the Bank of Th
The BOT requires commercial banks to set loan loss provisions of at least 1 per cent of outstanding loans, but the industry at present has an average of 3.2 per cent.
Salinee Wangtal, central bank assistant governor, said the 4-per-cent loan loss provision planned by Thai banks was a global high.
She said that loan reserves were regarded as a normalised provision for good debt, which was different from provisions for bad debts. The latter must be adequate to cover no less than 100 per cent of non-performing loans (NPLs).
The banks set high loan reserves for good debt to build confidence for when the economy suffers a crisis. Currently the domestic economy is growing, but if the global economy has problems that impact on Thailand and spread to a local bank’s borrowers, it might suffer damage, so high loan loss provisions are a shield against any future trouble.
“We don’t know whether the global economy will have an impact on the Thai economy or not, because even if we can look after the [national] economy, external factors could hurt borrowers, causing a drop in profits or higher NPL rates. Banks can use the loan loss provisions to maintain their balance sheet [in good order] and help borrowers pass the crisis,” Salinee said.
Kittiya Todhanakasem, first senior executive vice president of Krungthai Bank, said the BOT had encouraged the commercial banks to increase their reserves for good debt to deal with any unexpected crisis in the economy, and they had done so over the past couple of years.
