Some banks under pressure to comply with IAS
Some commercial banks are under pressure to increase reserve requirements to comply with the International Accounting Standard (IAS) 39, a new reserve provision standard expected to be adopted fully in 2008.
The Bank of Thailand (BOT) on Monday informed members of the Thai Bankers' Association (TBA) that they must tighten their reserve practices in case of impairment of loans. Under the new standard, commercial banks must make a provision for the amount that each loan exceeds the bank's future interest income - to be earned from that loan in terms of net present value (NPV) - plus expected income from collateral sales in the future. Currently, the present value of collateral, instead of expected income, is used to calculate the reserve provisions. Khunying Jada Wattanasiritham, Siam Commercial Bank (SCB) president and CEO, said that only a few banks would be affected immediately by the new regulation as most banks had enough reserves, which were higher than required. Banks could gradually follow the rule before the new requirement is fully implemented. A sou rce from the central bank said that banks whose portfolios contain a lot of substandard and doubtful loans, and banks with small collateral, would be severely affected by the new rule. However, the banking system's reserves are currently at 120 per cent of the BOT requirement. Banks are required to create reserves to comply with five categories of debtors, in which a 20 per cent provision for substandard loans and a 50 per cent provision for doubtful loans are included. Even though the central bank has not yet decided whether the new standard would be adopted immediately or gradually, banks should prepare for the new regulation from now on instead of waiting for full implementation, said the source. Tongurai Limpiti, a senior director of the Financial Institutions Policy Group, said banks would inevitably be obliged to follow the new accounting standard as foreign banks abroad have already followed it. The new supervision will help strengthen the banks as their profits would be used to boost reserves instead of paying out dividends to shareholders. Meanwhile, BOT governor MR Pridiyathorn Devakula said that the banks have more time to adapt before the rule is implemented fully in the next two years. "Some countries have adopted the new practice since last year but we have to study it for another six months before discussing the matter with the banks again," said the governor. The central bank source said the rule would not lessen the banks' lending as they currently were cautious about credit risk but they must pay more attention to their debtors. Anoma Srisukkasem, The Nation
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