Towards a world of universal banking

When the Deposit Insurance Act was first implemented, there were fears that lowering the limit would trigger a flow of deposits from small banks, which are more vulnerable to shocks, to large banks. Many still remember the long queues at small banks’ headquarters in 1997, as customers lined up to take out their money. 

Back then there were far fewer bank branches and ATMs hadn’t spread beyond the major cities. Bank runs hit the headlines as small pieces of bad news sparked a chain reaction. 

But those scenes belong to a different era, in which a primitive definition of risk assets resulted in a disproportional allocation of capital. The situation has changed. In line with international standards of asset classification, Thai banks now allocate huge capital. According to the Bank of Thailand, at the end of 2014, the aggregate capital adequacy ratio of Thai banks stood at over 16 per cent of risk assets, well above the 8.5 per cent requirement.

The chance of migration is also limited by the growing level of financial sophistication among depositors today. Most now understand well how dangerous it is to put all their money in one basket.

The deposit protection law was enacted in 2008 following the financial crisis. The protection limit was initially set at Bt100 million per account per bank before being cut to Bt50 million then reduced again yesterday.

The change today has drawn little interest from the general public, which is perhaps unsurprising given that the number of deposit accounts valued at over Bt25 million comprise only 0.06 per cent of the 67.2 million total accounts. 

Banks, meanwhile, have shown far more concern, worried that their wealthy customers will seek better protection for their deposits elsewhere. Notably, under the new limit, the well-off can seek full protection on deposits worth up to Bt325 million if that sum is spread equally in deposits at all 13 commercial banks. 

Many banks seek to build long relationships with customers in order to maintain their base of depositors. Bangkok Bank is now working with third-generation customers. The large customer base allows it to offer financial solutions that suit its clients’ business demands and personal preferences. 

Kasikornbank and Siam Commercial Bank have also been active in strengthening their wealth management service for clients, who can seek financial advice any time, at special lounges opened at fancy downtown office buildings and even at Suvarnabhumi Airport. 

More services are on offer to wealthy customers, mostly on “no-limit” investment alternatives. Customers are no longer advised to keep their money idle in deposit accounts but instead make it “work” in large pools of investment instruments suited to their risk appetite. 

Such services are also offered by small banks, which have to offer slightly higher interest rates to woo depositors. 

Nearly all banks have stakes in asset management companies, where fund managers keep tabs on domestic and international developments. The information from these fund managers helps banks provide better investment alternatives to their clients. In this globalised era, Thailand keeps a close watch for developments in Greece or changes like the recent plunge in China’s stock market. 

While clients reap higher returns, the banks profit by retaining depositors and earning fees. Like it or not, banks need to offer universal services. And the demands will only rise in the future.

On August 11 next year, the protection limit will be cut again, to Bt1 million. Notably, the number of Thai deposit accounts worth Bt1 million or less is 98.5 per cent. From next August, full deposit protection for an individual will drop to only Bt13 million. 

While this might not spark an exodus from large to small banks, it may trigger migration from traditional banking services to alternative forms of saving and investment. Many middle-income earners are now saving through long-term equity funds. Seeking higher returns, they also invest in other mutual funds. That is a must when the price of goods is still rising despite low inflation and low interest returns. 

In the first half of this year when inflation was well below 2 per cent, the average return on equity funds investing in large-cap Thai stocks was only 1.1 per cent while funds investing in mid-to-small-cap stocks was 3.38 per cent, according to Morningstar Research (Thailand). That was against 16.5 per cent for equity funds investing in Japanese stocks and 11 per cent for funds invested in Germany.

The wealthy noticed this trend some time ago, and now middle-income earners are beginning to follow suit. However, the crucial question of whether people on the bottom rung can climb the financial literacy ladder remains, as yet, unanswered.