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Published on March 31, 2008

Such a policy could help lessen the concentration of wealth among big business.

However, a policy with a good objective, if formulated with a wrong perception or implemented in an abusive way, could lead to certain casualties - as happened in the case of SME Bank from the end of 2003 to mid-2006. The newly appointed bank president brought in by the then government accelerated loan growth from Bt18.4 billion at the end of 2003 to Bt43.79 billion to June 2006.

However, later on, an audit team from the Bank of Thailand discovered improper conduct in approving many loans and reported non-performing loans as high as 47 per cent of the total loans outstanding at the end of 2006. In response to that report, the Ministry of Finance set up a fact-finding committee and, as a consequence, a legal complaint for malfeasance was lodged with the Office of the National Counter Corruption Commission against the former president of the bank, who left in mid-2006, The new board of directors appointed in late 2006 was able to resolve only some of the non-performing loans (NPLs) - requiring a write-off of loan losses, leading to an operating loss in 2006. More of the existing NPLs have yet to be solved.

The question is:why does a policy with such good objectives lead to casualties?

The reasons are:

l wrong perception of the policy formulator about the credit market for SME

l improper recruitment of management

l relations between politicians and management.

A root cause for the first reason is the misconception that financial support for small and medium-sized enterprises from commercial banks is insufficient and that the special-purpose bank is needed.

In fact, out of the total loans of some Bt6.2 trillion in the banking system, as high as Bt2.7 trillion was loaned by commercial banks to small and medium-sized enterprises (by the definition of the Ministry of Industry), while loans from SME Bank were only Bt43 billion in total.

Commercial banks have been supporting small and medium-sized enterprises all over the country for a long time. Enterprises upcountry are usually of this kind. Most of the currently large enterprises have been looked after since they were considered medium or small. The policy to provide increasing financial support to SMEs would be more effective if it were done through the commercial banking system whose network covers the entire country.

In addition, commercial banks have a better know-who and know-how of this market. Business with good potential and entrepreneurs with clean credit records would normally be grabbed by commercial banks, which have a nationwide network. Those who turned to the SME Bank were normally the ones declined by commercial banks largely due to their past records, while some were actually new to the business - who should be taken care of by SME Bank. However, as the then government wanted SME Bank to expand its lending rapidly, the management brought in by the government, acted in response to the policy promptly.

Lending practices did not involve proper credit assessment and were dubious. Also, clients introduced by politicians easily got their loans.

It is advisable that the policy to render financial support to small and medium-sized enterprises in order to stimulate the economy should be done more through the commercial-bank network than SME Bank.

A low-interest loan programme for small and medium-sized enterprises through commercial banks, launched by the Ministry of Finance recently, is a move in the right direction. However, SME Bank, could still have a role in catering to the needs of small and medium-sized companies who are new in the business and not known to commercial banks; and for financing projects where SME Bank has better information than the commercial banks. An example would be the kind of information possessed by the Institute for Small and Medium Enterprises Development of the Ministry of Industry.

The Institute has its branches all over the country and possesses a lot of industrial know-how. Should the Ministry of Industry make use of the knowledge of this Institute in collaboration with SME Bank, the new-born entrepreneurs working with the Institute can also have access to financial support from SME Bank.

I would strongly urge the government not to appoint a person who is all-out aggressive to be its manager ever again.

If possible, the government should allow the current board of directors, who have been solving various pending problems, more time to clean house and strengthen the financial position of the Bank. A change of the board at this time could disrupt the resolving process. Even worse, should an incompetent person be appointed, the problem might become chronic.

Until next Monday.

MR Pridiyathorn Devakula

The Nation