Time to review the mission of the state-run banks

Now that the Yingluck government plans to instruct the state-run banks to help the administration realise its populist policies by providing financial support for these interest-subsidised projects, it is worth reviewing whether the role of the state-run banks is desirable or not.

State-run banks were originally meant to provide financial liquidity to small borrowers who might otherwise have been ignored by the commercial banks. However, some of these state-run banks have expanded their role to serve a number of purposes and, at the same time, compete with the commercial banks by offering similar services and targeting the same group of customers.

Questions have been raised recently over the role of these banks. In fact, the Finance Ministry has commissioned the World Bank to study the proper role and operation of the state-owned banks in Thailand. Part of the study is to ensure the state-run banks are still serving their original purpose. This in the wake of some expanding their role beyond the original mission.

Various governments have often used the state-run banks to realise their own policies and political agenda. For instance, the Democrat-led government instructed the Government Housing Bank (GHB) to approve housing loans at zero interest for two years to help low-income earners. The current Pheu Thai-led government also has plans to announce a zero-interest loan policy shortly, in order to fulfil the pledge that it made during the election campaign. Nearly all governments have asked the Bank for Agriculture and Agricultural Cooperatives (BAAC) to provide financial support for their various rice subsidy programmes.

State-run banks were originally set up to serve the small-time borrower by providing special conditions to meet unique demand. For example, the state-run banks would allow flexibility for farmers by extending the loan period before the loan was deemed non-performing. This was usually based on the harvest season and the periodic income of farmers. The Government Savings Bank's traditional role was to promote savings among low-income earners. The GHB was set up to provide mortgage loans to people in the same income bracket.

In theory, the state-owned banks should help the country realise its progress effort by spurring financial development and stimulating economic growth. But these banks now seem do be doing the opposite, in the absence of proper review procedures and transparent operations. The state-owned banks will eventually depress the country's financial development if the government has to eventually use taxpayers' money to subsidise their losses.

State-run banks can enjoy success, as the GHB has so far achieved, providing half of the housing loans in Thailand. But some of these banks have been asked by the government to provide special financial assistance to support its controversial policies, even though some of populist programmes may not guarantee a satisfactory return. The BAAC, for instance, has to shoulder the burden of massive losses from a series of failed rice price subsidy programmes. Eventually, the Finance Ministry may have to help the BAAC with this burden by covering the losses through taxpayers' money.

It remains unclear to what extent these state-run banks have contributed to the country's development or how the government's policies that have been implemented via these banks have actually supported development in the long term.

Another challenging issue facing the state-run banks is their transparency and the credibility of their balance sheets. At the same time, their operations must live up to internationally accepted standards in order to maintain any degree of credibility.

The performance of these banks will have an effect on the financial market. Therefore, they must be managed according to international standards. Although these banks are state-owned, they should be managed by professionals who consider the interest of stakeholders as the priority and who are able to give fair and honest recommendations to the government. Otherwise, these banks will continue to be used by politicians at the expense of the public interest.

With the government planning to implement policies that the state-run banks will likely be involved in - such as farmers' credit cards or energy cards - it is now essential that we revisit the original missions for these banks. These banks were created for the wider social benefit and they should not end up becoming a social burden. State-run banks are inherently fragile institutions and they can be exposed to self-fulfilling runs if they lose the trust of the public - in the same fashion as any commercial bank.