Some commercial banks may need to recapitalise this year to enable them to comply with the new International Accounting Standard, IAS39, and to support business expansion, according to the Bank of Thailand.

Despite the adoption of the new accounting standard, the banking system's non-performing loans (NPLs) are expected to decline to about 2 per cent of total loans by the end of 2007.

Central bank assistant governor Krirk Vanikkul said some banks' capital adequacy will be slightly affected by the introduction of IAS 39, which requires them to increase their loan-loss reserves for classified loans. However, overall, banks' capital is unlikely to be more than 8.5 per cent below the minimum requirement.

Krirk said the new accounting standard's requirement for higher loan loss reserves would eventually reduce the overall tier-one capital of commercial banks to less than 10 per cent. As a result, banks may later elect to raise capital to maintain their more-than-adequate levels above 10 per cent.

"IAS39 will have a slight impact on low-capital banks. It will depend on whether they want to recapitalise," Krirk said, adding that the banks may also want to raise capital for business expansion.

Profits expected in the banking sector this year will also alleviate the need for banks to increase their capital, he said.

Under IAS39, the banks are required to set aside loan-loss reserves equalling 100 per cent of the difference between the amount of loans and the present value of debtors' cash flows. In the case of loans with collateral, the full reserve is needed for the difference between the amount of loans and the present value of collateral. This rule applies to all loans on which debtors have failed to make repayments for more than three months.

Banks face the need to set aside full reserves for loans of doubtful class and doubtful-of-loss class in the middle of this year and for substandard-class loans at the end of the year.

At the end of 2006, they were obliged to increase reserve provisions for loans over which legal action is being taken. However, that requirement did not affect their capital. The total loan-loss reserves of commercial banks currently stand at Bt240 billion, which is Bt40 billion more than is legally required.

IAS39 will require banks to identify net NPLs, or total NPLs minus the reserves required by the new standard. Currently, the net NPL figure is Bt480 billion, representing about 4 per cent of total loans. It is calculated by a formula involving both collateral of Bt279 billion and reserves of Bt240 billion.

Krirk said the new rules had a "preliminary" status because the actual requirement of IAS39 will be announced formally at the end of 2008.

Anoma Srisukkasem

The Nation