Currency lending in Thailand

How is the use of MLR in Thailand affecting its foreign currency borrowing activities?

As a result of the relatively loose monetary policy implemented in Thailand post the 1997 currency devaluation, the banking system has remained extremely liquid. Domestic interest rates have become very attractive and local corporations, many of whom were badly hurt by exchange rate fluctuations, have lessened foreign currency borrowing activities.

Domestic syndicated lending in Thailand post-currency devaluation really took off in 2000. Scarcity of good quality credits and local financial institutions 'flight-to-quality' attitude has created tremendous competition for the few good new credits and the race to the refinancing of good old credits.

The successful completion of syndicated long-term project financings, such as Ratchaburi Power for Bt 44 billion ($1 billion) and Thai Tap Water Supply foráBt 7 billion ($160 million), attest to the abundance of liquidity in the banking system. Both projects were done entirely on a baht basis with no international involvement.

The further development of the domestic syndicated loan market will depend primarily on the speed with which the local bank market adapts an acceptable standard interest benchmark and the ability of banks to recover from the current plaguing non-performing loan situation.

Historically, majority lending in Thailand has been on a bilateral basis. As a result, the lending benchmark rate typically used is each individual bank's prime daily lending rate, called the Minimum Lending Rate ("MLR") in Thailand.

Unlike the international syndication markets where the London InterBank Offering Rate (LIBOR) is a generally accepted benchmarkáwhich can be quoted to a borrower on a fixed period such asáthree months, MLR is simply a rate determined by bank management and is subject to change on a daily basis. Factors such as subsidies on each individual bank's non-performing loan portfolio and overhead expenses are also sometimes incorporated into MLR. If we compare MLR to bank fixed deposit rates, the average discrepancy over the last 10 years has been around 350 basis points per annum.

As a result of the scarcity of good assets and the recent surge in local bond market activity due to extremely attractive baht interest rates, tremendous pressure has been placed on local financial institutions to develop an acceptable lending benchmark. Success has been limited as attested by the unused but often-quoted Bangkok Inter-bank Offer Rate ("BKIBOR"). To book assets again, local banks are now beginning to accept domestic syndication based on a sub-MLR basis. One of the drawbacks is that sub-MLR is not necessarily transparent to the borrower in order for it to understand its credit spread.

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