The time is not ripe for a national AMC

Calls by some political parties to establish a national asset management company to buy the bad loans of local banks would be a sweeping reversal of existing policy. It also would represent a profligate waste of taxpayer money.

Finance Minister Tarrin Nimmanahaeminda's key strategy for financial sector reform was outlined in August 1998, when he announced that 300 billion baht in state funds would be available as capital support for local banks and finance companies. But taxpayer funds do not come free -- institutions seeking a bailout would have to first set aside money for their bad loans, as well as accept possible management changes.

Setting up a national asset management company has been used in many countries to deal with banking crises. For one, it represents a relatively quick way of dealing with the problem of deteriorating assets, and helps clean up problems faster than a purely market-driven approach. Another advantage is that by pooling the worst loans, debt restructuring becomes easier, as borrowers only have to deal with a single creditor instead of holding lengthy talks with multiple lenders.

But a national asset management company relies on taxpayer funds to buy loans. One major detail which must be decided is how to price the assets. If the AMC pays the banks too much, taxpayer costs increase. But offer too little, and banks are unlikely to sell, given that their losses would increase as a result.

The central premise that a national AMC would somehow encourage banks to resume lending also is flawed. The main problem, according to bankers, is not that they have insufficient resources or capital to lend. The reality is that the best companies can turn to their own cash flow, export earnings or the bond and equity markets for funds. The companies being refused loans now are being denied largely because they represent a risk, whether it be through existing high debt levels or questionable future business prospects.

For borrowers, the thought of a state-assisted bailout is appealing, as one is much more likely to negotiate a cheaper settlement with a government agency than with an executive at a private bank whose personal rewards are tied to protecting the benefits of his employer. But a national AMC would do little for most individuals and small firms which, because they are relatively easy to restructure, represent the least likely prospect for sale by a bank.

It would be better to continue on the path already chosen, where market forces have been allowed to press both banks and borrowers to reform, than to spend time and money on a ill- conceived campaign idea which would do little to help the economy in the long-run.

-- The Bangkok Post