Where did all Thailand's non-performing loans go?
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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During the 1997 economic crisis many businesses couldn't pay back their loans and banks eventually seized their property, but where did all this property go?
Real estate auctions held by banks around Thailand have been selling this property for years, but these auctions never seem to end.
"What's going on?" is the natural question a curious onlooker asks.
Today a specialist on the subject of Non-Performing Loans (NPLs) from the Thai subsidiary of the major international accounting firm Price-Waterhouse Coopers gives us an overview of the current situation. He describes the part of this real estate and loan drama that is hidden from non-specialists.
It's dense article, full of technical accounting vocabulary, especially vocabulary for accounting within banks.
It's the sort of article that you'd skip over when casually reading the newspaper, but well worth the effort for the new information and vocabulary it provides.
For further reading, PriceWaterhouseCoopers also has a newsletter devoted to non-performing loans in Asia.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. Under the new IAS 39 international accounting standards, what kinds of changes are likely to occur in Thailand's banking sector in the near future?
2. Will changes in NPL reporting requirements lead to higher or lower reported NPL figures? Provide an example.
3. Will this change in reported NPL reflect change in the actual NPL position of banks?
4. How large (in baht) is Thailands existing NPL problem?
5. Will the new reporting standards solve Thailand's existing NPL problems?
6. What two ways can NPLs be dealt with?
7. What is the problem with restructuring?
8. Why are restructured loans downgraded to "Non-Commercial Status"?
9. What is the problems with using foreclosure as a solution to NPLs?
10. Is foreclosure an effective way of dealing with NPLs in all sectors of the real estate market?
11. What strategy have banks taken to recover the value of their loans? Has this strategy worked? Why or why not?
12. What percentage of appraised values do Asset Management Companies (AMCs) such as BAM typically pay for real estate?
13. Have Thai banks offloaded as many of their NPAs as banks in the neighboring Phillipines, Taiwan, China, India, and Malaysia?
14. Why might some of the NPL in these countries be attracted to Thailand in the near future?
Bangkok Post Article April 03, 2007
Opportunities for banks with distressed debt funds
PricewaterhouseCoopersLast month, we reported on the initial stages of International Accounting Standard 39 (IAS 39) compliance. Under the new requirements, banks will become increasingly vulnerable to changes in their non-performing loans (NPLs), and thus will be under pressure to better manage their NPL positions. These measures are in line with the Bank of Thailand's aim to reduce NPLs within the banking sector to 2% over the next 12 to 24 months.
As of Jan 1, 2007, the central bank also requires banks to report their net NPL figures (i.e. after deducting relevant reserves), as opposed to gross figures, as have been reported in the past. For example, in November 2006, the reported gross NPL figures indicated that 8.86% of commercial bank loans were classified as NPLs. Conversely, the number as at the end of February 2007 was 4.31% (net of applicable loan-loss reserves). While this will allow lower figures to be reported, it still does not change the overall NPL position of commercial banks, nor does it address how commercial banks can resolve their current NPL problems.
While the recent guidelines introduced by the central bank are designed to improve NPL management, and thereby reduce the amount of NPLs, it does not address how commercial banks can resolve their approximate 465 billion baht (according to central bank figures as of November 2006) of NPLs presently in the system.
Historically, the predominant method for dealing with NPLs has been via restructuring and returning to performing, or foreclosure and sale/transfer of ownership of underlying collateral (primarily real property) to the bank. While there have been many successful restructurings, the instance of repeat NPLs (i.e. failed restructurings and hence return to NPL status) has been steadily rising over the past several months.
This number has also been affected by the central bank conducting spot audits at commercial banks and deeming certain restructuring plans "non-commercial", and consequently downgrading these loans to NPL status. "Non-commercial" restructuring plans are primarily those with long grace periods and/or minimal interest payment requirements, and bullet repayments to satisfy outstanding principal due in several years.
As an alternative to restructuring, commercial banks continue to actively pursue foreclosure as a means of loan resolution. However, sale prices are often lower than expected. Despite the recovery of certain sectors of the property market, supporting property collateral often falls outside these sectors and therefore has yet to recover the initial price declines due to the economic problems in the late nineties.
As a result, most banks have opted to transfer ownership of the asset to themselves as a debt offset for sale at a later date when property prices have recovered. However, in many instances, prices have not recovered and commercial banks are now holding literally thousands of properties on their books.
As an additional measure to assist in the NPL and non-performing asset (NPA) cleanup, the central bank has mandated state-owned Asset Management Companies (AMCs), such as the Bangkok Commercial Asset Management Company (BAM), to buy NPLs and NPAs from commercial banks that meet certain criteria. Primarily, this is for banks with NPLs in the later stages of the foreclosure process, with underlying real property securing debt or NPAs.
A number of banks have subsequently sold NPAs to BAM, and BAM recently announced contracts to purchase 30 billion baht worth of NPAs from thirteen banks and three debt-management companies. The purchase prices reputedly ranged from 12% to 33% of the appraised values of the underlying collateral.
A number of banks have also recently established wholly owned AMCs and have transferred large amounts of NPLs and NPAs to these AMCs for workout. In addition, a number of private parties have established AMCs with the express purpose of buying NPLs and NPAs from banks. In this regard, an AMC enjoys certain advantages in purchasing NPLs over, say, a limited company, as there is a separate act governing the activities of AMCs. To date, there are 14 registered AMCs in Thailand. According to the central bank they have acquired approximately 58 billion baht worth of NPLs as of January 2007.
However, unlike its neighbouring Asian countries, such as the Philippines, Taiwan, China, India, and more recently Malaysia, commercial banks in Thailand have not generally looked to offload significant amounts of NPLs and NPAs to the ever-increasing number of investors who specialise in acquiring these types of assets from banks. So, while the central bank is placing ever-increasing pressure on banks to lower NPLs, it is questionable whether banks will be able to reduce them through workouts and transfers to wholly owned AMCs alone.
With NPL and NPA transaction activity dwindling in neighbouring Asian countries (as much of the NPL stock in these countries has been sold), and cash-rich investors eagerly seeking new opportunities, now might be the time for Thai banks to once again consider large-scale portfolio sales as a means of quickly reducing their NPLs and NPAs.
Frank Janik is a director of crisis management at PricewaterhouseCoopers Thailand. For more information on our crisis management services, please visit www.pwc.com/th. We welcome your comments and questions at leadingtheway@th.pwc.com
Vocabulary (in discussion above)
default, in default - fail to pay back a loan, as promised
Non-performing loan (NPL) - a loan that are in default or close to being in default
distressed debt - debt with repayment problems
funds - money for a special purpose
professional services - specialised and technical services such as lawyers, accountants, business consultants, architects, real estate appraisers, and engineers, chosen by skill, knowledge, reputation, and creativity, including (See Wikipedia)
PriceWaterhouseCoopers - the world's largest professional services firm, the largest of the Big Four accounting firms (See Wikipedia)
International Accounting Standard 39 (IAS 39) - the international financial reporting standards that defines the valuation and reporting of financial instruments such as derivatives, loans, and employee option schemes (See Wikipedia on International Financial Reporting Standards)
compliance - following rules and regulations
vulnerable - easily hurt
x is under pressure by y to z - y is trying to force or persuade x to do z
a position - the amount of an asset that you own, ownership situation (for example I have a large position in rice futures for September delivery)
NPL positions - the amount of Non-Performing Loans that you own
x is in line with y - agrees with, is compatible with (See glossary)
report, financial report - every year banks must publish financial statements reporting the company's performance to shareholders and the public
accounting books - a record and summary of a company's business transactions during the last month or year (for example, the general ledger, accounts payable, accounts receivable,...etc)
set aside - keep money for a special purpose (for example, set aside money for your child's education)
cover - pay money for something (for example, I'll cover the dinner bill, or your insurance does not cover this treatment)
set aside to cover - keep money to pay for
reserves - money set aside in a company's accounting books to cover something
a gross figure - total amount of money (x)
a deduction, deducting - an amount of money subtracted from a larger amount (y)
a net figure - an amount of money after deductions (x - y)
Collocations / Word Combinations:
a. loan-loss reserves - money that a bank sets aside in their accounting books for expected losses on loans
b. net of applicable loan-loss reserves - after subtracting off money set aside to cover loan losses
c. net NPL figures
d. deducting relevant reserves
resolve a problem - find a solution to a problem
address a problem - try to understand and solve a problem
predominant - more important or noticeable than others
bankruptcy - when a company fails and does not have enough money to pay their debts (so they stop doing business and their assets are used by a court to pay off debts)
restructuring - a debtor-creditor agreement to make an asset or loan performing again (debtor agrees to changes in his business, the creditor to changes in loan terms)
bankruptcy or restructuring - in the United States bankruptcy (Chapter 11) and restructuring (Chapter 7) are the two possibilities for dealing with a failed company that cannot pay off its debts, in bankruptcy the assets of the company are sold off to pay the creditors (people who lent the company money) and in restructuring the company is reorganised to it can do business again and then repay its debts
foreclosure - lender taking back property after failure to pay back loan for property (legal procedure)
underlying - supporting something (underneath), the basis or foundation for
pledge - promise to give
pledge an asset - provide an asset as a guarantee that you will do something (if you do not do it, you lose the asset, they get the asset)
collateral - an asset pledged as a guarantee that you will pay back a loan
underlying collateral, supporting property collateral - the pledge asset whose value supports a loan (if you do not pay back the loan, they will take the asset, so they will not lose so much money)
on the spot - right here, right now, without warning
a spot check - a surprise check, to see if you are following the rules (for example in Thaiand the police often make spot checks for people wearing their motorcycle helmet or if they have a driving license)
an audit - checking the accounting records of a company, to see whether they are following accounting rules
a spot audits - a surprise audit (not a complete or full audit)
x consequently y - y as a result of x (x then y, x caused y)
status - quality, situation, category (used to determine legal rights)
NPL status - the situation of the loan makes it non-performing (NPL) (for example payments for loan were not received on the loan for the last 90 days, so the loan is in default)
high status, low status - higher quality or lower quality
downgrading status - changed to a lower status
grace periods - a period of time when rules do not apply (for instance the library has a grade period of one week before they charging fines on books that are returned late)
a bullet Loan a loan that requires a one large payment (a balloon payment) at the end of the loan, this usually requires borrowing money again to make the balloon payment.
a bullet repayment - a single payment for an entire loan amount that is paid at maturity.
principal - the amount of money borrowed (the total to be paid back: principal + interest)
outstanding - not yet paid (for example outstanding bills)
satisfy outstanding principal - pay off or cover the principal that has not been paid back yet
a debt offset - a deduction for a debt
non-performing asset (NPA) - an asset such as a mortgage that is not currently accruing interest or on which interest is not being paid (Source)
x mandates y to do z - government agency x officially gives y permission or authority to do z
Asset Management Companies (AMCs), debt-management companies - special companies with special rights to deal with "significant banking sector problems." (See Bank of International Settlements Paper (2004) and BOT's list of AMCs in Thailand and 2004 ADB paper and ADB book)
Bangkok Commercial Asset Management Company (BAM) - one of the first and largest AMCs in Thailand (See website)
security for debt, securing debt - collateral for debt
reputedly - people say it is true, but you are not sure
an appraiser, a real estate appraiser - someone whose job is to determine the value of property
appraised value - the value of a property as determined by a real estate appraiser
for workout - for dealing with a non-performing asset (for selling the asset (liquidation), or making the asset performing again)
a limited company - a company registerd with the government in Thailand
look to - plan to
offload - get rid of something bad (that is a burden)
dwindling - becoming smaller, weaker, or less
Answer Key:
1. Under the new IAS 39 international accounting standards, what kinds of changes are likely to occur in Thailand's banking sector in the near future?
a. Increasing vulnerability to changes in NPLs.
b. Banks under pressure to better manage their NPL position.
c. Reduction in NPLs to 2% of loan over the next two years.
2. Will changes in NPL reporting requirements lead to higher or lower reported NPL figures? Provide an example.
New reporting requirements will lead to lower reported NPL figures. For example, NPLs for commercial banks were 8.86% in November, 2006 and 4.31% in February, 2007.
("As of Jan 1, 2007, the central bank also requires banks to report their net NPL figures (i.e. after deducting relevant reserves), as opposed to gross figures, as have been reported in the past. For example, in November 2006, the reported gross NPL figures indicated that 8.86% of commercial bank loans were classified as NPLs. Conversely, the number as at the end of February 2007 was 4.31% (net of applicable loan-loss reserves).")
3. Will this change in reported NPL reflect change in the actual NPL position of banks?
No, the actual NPL positions of banks will not change.
("While this will allow lower figures to be reported, it still does not change the overall NPL position of commercial banks, nor does it address how commercial banks can resolve their current NPL problems.")
4. How large (in baht) is Thailands existing NPL problem?
465 billion baht as of November, 2006.
5. Will the new reporting standards solve Thailand's existing NPL problems?
No, the reporting standards will "improve NPL management" but Thai commercial banks still face the problem of how to resolve the NPLs already in the system.
("While the recent guidelines introduced by the central bank are designed to improve NPL management, and thereby reduce the amount of NPLs, it does not address how commercial banks can resolve their approximate 465 billion baht (according to central bank figures as of November 2006) of NPLs presently in the system.")
6. What two ways can NPLs be dealt with?
a. Restructuring of the loan, followed by the loan returning to being a performing loan.
b. Foreclosure and sale of the assets used as collateral for the loan.
7. What is the problem with restructuring?
Many restructurings fail and return to NPL status.
8. Why are restructured loans downgraded to "Non-Commercial Status"?
Because the loans had:
a. Long grace periods.
b. Minimal interest payments.
c. Large bullet payments at the end of the loan that required refinancing the loan.
9. What is the problems with using foreclosure as a solution to NPLs?
The sale price of the collateral is low.
10. Is foreclosure an effective way of dealing with NPLs in all sectors of the real estate market?
No, some real estate sectors have recovered from the economic crisis of the 1990s, so property values allow the value of the loan to be recovered from the collateral. Other sectors have not recovered and property values do not allow the value of the loan to be recovered from the collateral.
("...commercial banks continue to actively pursue foreclosure as a means of loan resolution. However, sale prices are often lower than expected. Despite the recovery of certain sectors of the property market, supporting property collateral often falls outside these sectors and therefore has yet to recover the initial price declines due to the economic problems in the late nineties.")
11. What strategy have banks taken to recover the value of their loans? Has this strategy worked? Why or why not?
Banks have chosen to become owners of the real estate themselves, but since the property values of a lot of real estate has not recovered since the crisis, they are holding too much real estate.
("...most banks have opted to transfer ownership of the asset to themselves as a debt offset for sale at a later date when property prices have recovered. However, in many instances, prices have not recovered and commercial banks are now holding literally thousands of properties on their books.")
12. What percentage of appraised values do Asset Management Companies (AMCs) such as BAM typically pay for real estate?
12% to 33%.
("A number of banks have subsequently sold NPAs to BAM, and BAM recently announced contracts to purchase 30 billion baht worth of NPAs from thirteen banks and three debt-management companies. The purchase prices reputedly ranged from 12% to 33% of the appraised values of the underlying collateral.")
13. Have Thai banks offloaded as many of their NPAs as banks in the neighboring Phillipines, Taiwan, China, India, and Malaysia?
No, they have not.
("However, unlike its neighbouring Asian countries, such as the Philippines, Taiwan, China, India, and more recently Malaysia, commercial banks in Thailand have not generally looked to offload significant amounts of NPLs and NPAs to the ever-increasing number of investors who specialise in acquiring these types of assets from banks. So, while the central bank is placing ever-increasing pressure on banks to lower NPLs, it is questionable whether banks will be able to reduce them through workouts and transfers to wholly owned AMCs alone.")
14. Why might some of the NPL in these countries be attracted to Thailand in the near future?
NPL and NPA activity is decreasing in these countries, so they might come to Thailand looking for deals.
