“Given the current economic situation, banks are quite careful in extending more loans, particularly to small businesses,” Yongkittikul, whose association represents lenders including Bangkok Bank Pcl, Siam Commercial Bank Pcl and Kasikornbank Pcl, said “To help banks become more confident, this credit guarantee scheme would be very helpful.”

Loan guarantees for exporters and small businesses are “absolutely essential,” Prime Minister Abhisit Vejjajiva said on January 31.

Southeast Asia’s second-largest economy may grow no more than 2 percent this year as exports and investments decline, according to government forecasts. Exports, which make up 70 percent of gross domestic product, may shrink as much as 8.5 percent this year, the first drop since 2001, according to the Thai central bank.

Ministerial proposal

The Thai Bankers’ Association submitted its proposals to the government at the end of January and has yet to hear back, Yongkittikul said. The Small Business Credit Guarantee Corp., which guarantees part of companies’ borrowings that exceed the value of their collateral, has “very limited” capacity left, he said.

Finance Minister Korn Chatikavanij will ask the Cabinet tomorrow to approve a 12 billion baht plan to boost capital at three state financial institutions, he told reporters in Bangkok Monday. The Small Business Credit Guarantee Corp. and the Export-Import Bank of Thailand would get 5 billion baht each under the proposal and the Small and Medium Enterprise Development Bank of Thailand would get 2 billion baht, he said.

“Small businesses are having problems seeking sources of funding,” Chatikavanij said, without mentioning the banks’ request for funds. “The government plans to provide loan guarantees for them to reduce risk to banks.”

In addition, Chatikavanij said he would ask the cabinet to approve a 200 billion baht short-term loan facility for state enterprises. The credit line will be guaranteed by the ministry and offered to state enterprises like Thai Airways, the nation’s largest airline, to help them secure bank loans.

Short-term solution

“Loan guarantees may work in the short term, but in the longer term the government will need something else to restore the functionality of the banking system,” Isara Ordeedolchest, an economist at KTB Securities Ltd. in Bangkok, said in a phone interview Monday. “Bankers have to be confident in the economy, so I would also like to see the government spend on medium-sized investment projects like roads in rural areas and irrigation systems.”

The Bank of Thailand has said it may continue easing monetary policy after cutting its benchmark interest rate to 2 percent in two reductions totaling 1.75 percentage points since December 3. Governor Tarisa Watanagase on January 28 said a government lending guarantee would help ease credit markets frozen since Lehman Brothers Holdings Inc. collapsed last September.

Rate cuts

Banks have stopped short of fully passing on the rate cuts, lowering loan and deposit rates by only as much as 0.5 percentage point. Lending this year may expand by less than half the 13 percent pace posted in 2008 by Bangkok Bank, the nation’s largest, according to the Thai Bankers’ Association.

The banks asked the Finance Ministry to provide low-interest funds that they could use to provide loans to small businesses, Yongkittikul said. The lenders would bear all the risk and reimburse the state when their loans are repaid by borrowers, he said.

“We obviously cannot have a big-scale program,” Prime Minister Vejjajiva said about a loan guarantee scheme in a January 31 interview at the World Economic Forum in Davos, Switzerland. “We will talk with the banks as to how much they think is needed and how much they can actually handle on their own.”

Source: Bloomberg