FAQs: Banking and Finance

Banking and Financial Laws, Contracts, Institutional Finance, Financial Workouts and Restructuring

Q:  What are the types of banking/financial institutions and the relevant regulatory authorities in Thailand?

A:  In recent years, key structural developments have been implemented in the financial institutions system pursuant to the Financial Sector Master Plan ("FSMP") introduced by the Bank of Thailand ("BOT") in 2004. Key aspects of such developments include the implementation of the "One-Presence" policy and the removal of the international banking facilities ("IBF"), and licensing reforms, resulting in significant consolidation and reduction in the types and numbers of financial institutions.

At present, all commercial banks have returned the IBF licenses to the BOT and transferred assets and liabilities of their IBF business to commercial banking business. Although finance companies and credit foncier companies were not precluded from operating their business, their scope of permitted activities are limited compared to other types of financial institutions, such as the restrictions on issuing checking accounts and deposit books, which render it more difficult for them to operate and to compete with other types of financial institutions.

The types of key banking/financial institutions in Thailand can be classified under the following groups:

• Deposit-taking financial institutions which consist of (1) commercial banks, (2) retail banks, (3) foreign bank branches, and (4) subsidiaries of foreign banks in Thailand. The BOT and the Ministry of Finance (MOF) act as the regulatory authority.
• Finance companies and credit foncier companies which can take deposits in the form of issuing promissory notes, but are not allowed to offer checking and passbook accounts. The BOT and the MOF act as the regulatory authority.
• Representative offices of foreign banks whose engagement in deposit-taking activities are prohibited. The BOT and the MOF act as the regulatory authority.
• Specialized banks and financial companies and asset management companies. In most cases, the BOT and the MOF act as the regulatory authority, with the exception of the Small and Medium Enterprise Development Bank of Thailand which is under the supervision of three regulatory authorities, namely the BOT, the MOF, and the Ministry of Industry.
• Credit Card Companies (non-bank). The BOT acts as the regulatory authority.
• Companies undertaking personal loan business under BOT supervision. The BOT acts as the regulatory authority.
• Securities companies, mutual fund management companies, provident fund. The Securities and Exchange Commission acts as the regulatory authority.
• Insurance companies. The Office of Insurance Commission acts as the regulatory authority.
• Social Security Fund. The Ministry of Labor and Social Welfare acts as the regulatory authority.
  

Q:  Are there any shareholder restrictions on commercial banks? If so, what are they?

A: The Financial Institution Business Act approved by the National Legislative Assembly was published on February 5, 2008 and came into force in August 2008 (180 days from the date of its publication). The new Act superseded the Commercial Banking Act B.E. 2505 (A.D. 1962) and the Act on Finance, Securities and Credit Foncier Business B.E. 2522 (A.D. 1979). The new regulation imposes the following restrictions on shareholding in a financial institution:

1. Shareholding exceeding 10% of total distributed shares by a single shareholder (whether directly or indirectly and including shares held by related parties of such person) is prohibited, unless otherwise approved by the BOT. In any case, shareholding exceeding 5% of total distributed shares by a single shareholder (whether directly or indirectly and including shares held by related parties of such person) must be reported to the BOT. However, there is a transitory provision allowing shareholders with shares exceeding the 10% limit to take action to comply with the newly prescribed proportion within 5 years from the date the regulation came into force.
2. Foreign ownership in a financial institution, other than a foreign bank branch or subsidiary of a foreign bank, must not exceed 25% of total distributed shares which carry voting rights and the proportion of foreign directors must not exceed one-fourth of total directors. Upon BOT approval, foreign ownership may be increased to 49% and the proportion of foreign directors to 50%. However, if it is necessary to improve the operating performance or to enhance the stability of a financial institution, or for the purpose of enhancing the security of the financial system, the Minister of Finance pursuant to the recommendation by the BOT may grant relaxations to allow majority shareholding by foreigners and/or increase the proportion of foreign directors.

Q:  What are the licensing regulations of commercial banks?

A:  The new regulation imposes the following requirements on obtaining a license to operate a financial institution:

Applicants for a license to operate a financial institution must be a public limited company registered under Thai law or a foreign bank wishing to establish a branch or a subsidiary in Thailand. The license will be granted by the Minister of Finance pursuant to the recommendation by the BOT. Although not explicitly prohibited under the new Act, based on the BOT's structural reform policy outlined in its FSMP, it is unlikely that there will be any new license granted for a new finance company or a credit foncier company. From the policy viewpoint, BOT plans to allow only commercial banking license and retail banking license. The commercial banking license will entitle the financial institution to engage in a full range of banking activities, whereas the retail banking license will restrict certain types of activities which are deemed to incur high risk including but not limited to engagement in currency trading and derivatives transactions. As indicated in the BOT's Financial Institution System Development Plan, a commercial bank and a retail bank will be required to maintain tier 1 capital of at least Baht 5,000 million and Baht 250 million, respectively.

The establishment of a representative office of a Thai financial institution in a foreign country and the establishment of a representative office of a foreign financial institution in Thailand must have permission from the BOT. Representative offices will not be allowed to take deposits, whether directly or indirectly.

At present, some existing finance companies and credit foncier companies still have the status of limited companies which have not been transformed into a public limited company. However, there is a transitory provision which states that those existing financial institutions which obtained licenses before the new Act came into force are deemed as having obtained licenses under the new Act and that all ministerial regulations, notifications of the MOF, and notifications of the BOT will remain in force to the extent that they are not contradictory to the new Act.

Q: What are other noteworthy restrictions on commercial banks?

A: 1. Capital Adequacy: Financial institutions must comply with the capital adequacy rules of the Bank of International Settlements (BIS). Commercial and retail banks, finance companies, and foreign bank branches must maintain their total capital fund at 8.5%, 8%, 7.5% of their risk assets, respectively. Credit Foncier companies must maintain their total capital fund at 6% of their assets. The new regulations will not affect these BIS ratios. However, pursuant to the implementation of Basel II, which is expected to have effect in December 2008, there will be changes in order to incorporate the credit rating of debtors in the calculation of risk assets.

2. Investment Limitations:

(a) Financial institutions are not allowed to hold shares or share-related instruments of any other financial institution, except those acquired as a result of debt settlement or a guarantee for credits granted. These shares must be disposed of within 6 months from the date of acquisition. Accepting the shares of other financial institutions as security is also prohibited.
(b) Financial institutions are not allowed to accept their own shares as security or hold instruments related to their own shares as prescribed by the BOT's criteria.
(c) Financial institutions are not allowed to hold more than 10% of a company's shares.
(d) Financial institutions' investment in a company's shares must not exceed 5% of the total capital funds of such financial institutions.
(e) Financial institutions' aggregate investments in shares of all companies must not exceed 20% of the total capital funds of such financial institutions.

However, the above prohibitions may be relaxed by the BOT, in which case the BOT may impose certain conditions for the relaxation granted.

3. Ownership of Real Estate: Financial institutions are not allowed to own immovable property, except for:

(a) their normal business operation, in which regard they must obtain the BOT's approval and comply with the BOT's conditions.
(b) where property has been acquired on debt settlement or via public auction of property mortgaged to the bank. Such property must be disposed of within 5 years from the date of acquisition, unless otherwise relaxed by the BOT and in which case the BOT may impose certain conditions for the relaxation granted.

4. Lending Limitations:

(a) Single Lending Limit: financial institutions are prohibited from lending, investing, and incurring contingent liabilities with a single person including such person's related parties in excess of 25% of its tier 1 capital.
(b) Related Party Limit: a financial institution is prohibited from lending, investing, and incurring contingent liabilities with each of its related parties in excess of 5% of the financial institution's tier 1 capital, or 25% of each related party's total liabilities, whichever is lower.

The above limitations may be relaxed upon the BOT's approval. These limitations do not apply in certain circumstance such as in the case of lending guaranteed by the Ministry of Finance or the FIDF; purchase of government bonds; lending backed by certain types of security such as cash deposit, government bonds, Financial Institutions Development Fund ("FIDF") bond security, etc; and issuance of letter of credit.

In addition, financial institutions are prohibited from granting credit facilities; provide guarantee on loans; sell, lease or provide gifts; and pay compensations or provide benefits beyond normal reasonable ground to their directors, authorized signatories, and management level officers.

Q: What are other noteworthy developments in the financial sector?

A: Deposit Insurance System moving from the present "blanket guarantee" to "limited coverage" guarantee

The Deposit Protection Institution Act was published on February 13, 2008 and came into force in August 2008 (180 days from the date of its publication). The new regulation moved the previous blanket guarantee system toward a limited coverage system.

Pursuant to this new regulation, the Deposit Protection Agency will be established with the responsibility of making compensation to depositors and managing a failed financial institution by acting as its liquidator, reimbursing for the compensation made, and also making payment to other creditors according to their shares. It will be a juristic person separate from the Bank of Thailand and managed by the Deposit Protection Board.

Membership in the Deposit Protection Agency is compulsory for commercial banks, foreign bank branches, finance companies and credit foncier companies. The members will pay a premium to the Agency at a rate not exceeding 1% of the average amount of insured deposits (at present financial institutions are contributing a flat rate of 0.4% of their deposits). The new rate may be set by the Deposit Protection Committee as a flat rate or differential rate according to type or performance of each member.

The plan is to gradually reduce coverage from full guarantee to the target amount within 4 years. During the first year of the establishment of the Agency, full coverage will apply, and each year afterwards the coverage will be reduced to 100 million, 50 million, 10 million and finally 1 million baht per depositor per institution. The amount of deposit which exceeds this coverage is to be recovered from assets of the failed institution through the process of liquidation.

(April 20, 2009)

The above is intended to provide general information only. The contents do not constitute legal advice and should not be relied upon as such. If legal advice or other expert assistance is required, the services of competent professionals should be sought.
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For further information, please contact Mr. Santhapat Periera, Partner & Head of Banking and Finance Group (santhapat.p@tillekeandgibbins.com).