Thai Credit Market Failures: The 1997 Aftermath

Abstract

Central to Thai credit market failures in the aftermath of 1997 debacle are information economics problem, balance sheet rehabilitation knowledge gap and declining value of collateral. But curing one form of market failure can lead to another. The best way to understand the failure in the credit extension process in Thailand is first to understand what market success and the ideal market are.Theoretical sources of capital for firm, information economics, degree of monitoring and risk sharing are among the next topics of discussion. The primary threat to Thailand credit market system lies in the Small and Medium Enterprise (SME),while personal consumption can be a major factor in Thailand's economic recovery process. Retail credit liberalization, nation-wide subsidized housing projects, a value chain system and a limited credit guarantee scheme are among the macro and micro economic proposals put forth in this paper to create incentive compatibility among stakeholders and to mitigate Thai credit market failures. Our essential theme is time, flexibility and growth via financial innovation as a way to jump start SMEs and to put Thailand's economy on the road to self-sustainable recovery. A classical S-learning curve is found to be applied in Siam Commercial Bank (SCB) multilayer loan restructuring process from the top management down to account officers. Taking SCB as a benchmark, the percentage of all individual private banks' NPLs can be expected to reach a sustainable percentage within December 2000. Since the informational and organizational capital of financial intermediaries has not been well preserved for the state owned banks, their proportion of NPLs is much higher than private banks'. With the most optimistic assumption, the loan restructuring process for the state-owned banks is not expected to be completed until the middle of 2001 at the earliest.