Tuesday, May 26, 2020

Central Bank earmarks Bt900 billion to save SMEs, stabilise corporate bond market

Apr 08. 2020
Veerathai Santiprabhob, governor of the Bank of Thailand (BOT).
Veerathai Santiprabhob, governor of the Bank of Thailand (BOT).
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By The Nation

The Bank of Thailand is planning additional measures worth Bt900 billion to rescue SMEs and the corporate bond market that have been severely affected by the Covid-19 outbreak.

Veerathai Santiprabhob, governor of the Bank of Thailand (BOT), announced that the central bank and the Finance Ministry were working together closely to swiftly implement measures to alleviate the impact of the outbreak on households and businesses. However, the intensity and longer-than-expected crisis requires additional relief measures to support small- and medium-sized enterprises (SMEs), which are the backbone of the economy and a primary source of employment. It is necessary for these businesses to have sufficient funding and liquidity to survive these testing times and retain their workforce.

He also said that it is essential at this time to have measures to stabilise the corporate bond market to ensure it functions normally as a financing source for the private sector as well as to safeguard the economy and the country’s financial stability as a whole.

The BOT governor said that it will cost approximately Bt500 billion to support SMEs, while Bt400 billion will be required to bolster corporate bonds.

SMEs will be granted soft loans with a grace period for payment at a subsidised interest rate, while designated bond funds will purchase corporate bonds in order to provide liquidity to the local bond market, which is worth Bt3.6 trillion or more than 20 per cent of the GDP.

The package comprises four key measures:

Measure 1: SMEs will be granted a 6-month holiday from payments with a credit line not exceeding Bt100 million in a move to provide much-needed liquidity to entrepreneurs.

SMEs that have a credit line with a commercial bank or a specialised financial institution worth no more than Bt100 million will be automatically eligible to pause the payment of both principal and interest for six months.

This break from payments will not be considered missed payments and will therefore not impair credit history.

The central bank hopes this measure will provide some relief to SMEs, and expects financial institutions to work closely with borrowers during this six-month period to restructure their debts so the debt repayment plan can be aligned with their declining incomes.

As for SMEs that are in the position to continue servicing their loans, BOT advises that they repay their loans as per normal or as much as they can because this measure is just a postponement of debt payment and interest charges will continue to accrue during the holiday period.

More importantly, a regular flow of loan repayment will also help financial institutions maintain liquidity so they can help other SMEs that are more severely affected.

Apart from further encouraging financial institutions to provide liquidity to borrowers, the BOT has also temporarily relaxed liquidity-related regulations.

Measure 2: Soft loans for SMEs that have a credit line of no more than Bt500 million at a concessional interest rate of 2 per cent per annum and no interest for the first six months.

The central bank will provide Bt500 billion at 0.01 per cent per annum interest rate to financial institutions for two years. These institutions can then use this money to lend to SMEs at a concessional rate of 2 per cent per annum.

SMEs that are eligible for this measure must

(i) operate domestically,

(ii) should not be listed on the Stock Exchange of Thailand or the Market for Alternative Investment (MAI),

(iii) have a credit line with a financial institution not exceeding Bt500 million, and

(iv) have a performing loan with normal repayment status or arrears of less than 90 days (non-NPL) as of December 31, 2019.

The maximum drawdown for the soft loan is 20 per cent of the loan outstanding as of end-December 2019. Interested SMEs can apply for soft loans at their banks.

For the first two years, SMEs will be charged a concessional rate of 2 per cent per annum, though for the first six months, the government will bear the interest burden.

In order to help expedite the issuance of new loans during this highly uncertain period, the government, through the Finance Ministry, will partly compensate financial institutions for losses that might be incurred on these additional new loans.

In case these loans turn into non-performing loans by the end of the second year, financial institutions will be compensated no more than 70 per cent of the additional loan given to borrowers with a credit line of up to Bt50 million, and no more than 60 per cent of additional loans for borrowers with a credit line of between Bt50 million and 500 million.

Measure 3: Market liquidity enhancement to stabilise the corporate bond market

The disruption of economic activities together with heightened volatility in global financial markets have also hurt the Thai financial market. Over recent weeks, investors have sought refuge in cash or cash-like assets resulting in the continuous sell-off of various types of debt securities. As a consequence, liquidity conditions in the corporate bond market, which is an essential channel of savings for households and of financing for businesses have tightened and shown signs of dysfunction.

Currently, the Thai corporate bond market is approximately worth Bt3.6 trillion or more than 20 per cent of the GDP. If the corporate bond market cannot function properly, or investors lose confidence during this period of economic uncertainty, additional financing or rollover will be limited and very costly, even for high-quality firms.

Therefore, there are risks that many corporations will experience liquidity problems and may not have sufficient capital to conduct normal business operations, which may become a systemic risk. This will impact savers through intermediaries such as fixed-income funds, provident funds, saving cooperatives, the Government Pension Fund, and the Social Security Fund.

In order to stabilise the corporate bond market by providing a liquidity backstop to ensure it continues functioning, the BOT and the Finance Ministry see the need to establish a Corporate Bond Stabilisation Fund (BSF) to provide bridge financing to high-quality firms with bonds maturing in 2020 to 2021, at higher-than-market “penalty” rates.

Eligible corporate bonds/issuers must meet a number of criteria including

(i) be at least an investment grade,

(ii) have raised the majority of their funding needs through other means such as bank loans or capital increase,

(iii) have a clear long-term financing plan, and

(iv) meet other conditions as set out by the BSF’s investment committee. In addition, if the issuers simultaneously offer secured bonds to the general public, the bonds that the BSF will invest in must also be secured with collaterals that are not inferior to those pledged on the bonds sold to the general public.

Measure 4: Reducing the FIDF fee to ease the loan interest burden on businesses and households.

The BOT will halve the rate of contribution from financial institutions to the FIDF from 0.46 per cent of deposit base to 0.23 per cent per annum for two years. This is intended for financial institutions to immediately pass on such cost savings to businesses and households by further reducing their loan rates.

Veerathai said in order for the BOT to effectively implement the above mentioned measures, the Cabinet has approved the two draft Emergency Decrees as follows:

1. Draft Emergency Decree on Financial Assistance to Small and Medium-sized Enterprises Affected by Coronavirus Pandemic, and

2. Draft Emergency Decree on Provision of Liquidity Support to Stabilize the Corporate Bond Market.

These decrees authorise the BOT to manage liquidity and direct funds to affected target groups. The decrees also put in place a mechanism that allows the government to indemnify for losses that may arise in the future in connection with these measures. This mechanism is necessary during this period of heightened economic uncertainty caused by the COVID-19 pandemic.

The decrees also enhance BOT’s policy toolkit that enables the central bank to readily and promptly deploy additional measures to support SMEs and ensure stability of the corporate bond market.

The BOT trusts that the suite of relief measures that have been continuously implemented starting from encouraging banks to engage in early debt-restructuring measure and the debt-payment holiday for retail customers, together with additional measures announced today will support affected businesses and households, stabilise the corporate bond market, and ensure the continued functioning and stability of the country’s financial system.

The governor said the central bank is closely monitoring the situation and stands ready to take further steps as necessary.

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