Thailand: Thai Asset Management Corporation (TAMC)

Originally published on March 6, 2002

Declared as Thailand’s last chance to clean up its non-performing loans (NPL) mess, the Emergency Decree on Thai Asset Management Corporation, or TAMC Decree, came into force on June 9, 2001. With all the good intentions but crippled with hastily drafted and obscure provisions, the TAMC Act has been riddled with criticisms and even a legal suit on its constitutionality. Finally clearing its constitutional hurdles in October 2001, the TAMC started accepting its first lot of asset transfer last October 15, 2001.

Essentially, what is a TAMC and what is it empowered under the Act?

The rationale for establishing a national asset management corporation is in order for the government to address the high level of NPLs in both state-controlled and private financial institutions and to set the environment right for the banks to recommence lending.

The TAMC is a government agency owned 100% by the Financial Institutions Development Fund (FIDF). TAMC will issue Baht 170 billion (approximately US$ 3.7 billion) 10-year notes guaranteed by the FIDF to financial institutions as payment for TAMC’s purchase of NPL assets from these financial institutions. The TAMC is managed by a Board of Directors consisting of no more than 11 members appointed by the Minister of Finance and approved by the Council of Ministers.

Basically, the TAMC is tasked with the acceptance of transfer of sub-quality asset and its management. Towards the realization of such objectives, TAMC has unprecedented encompassing powers, such as establishing of limited companies, guaranteeing credit for debtors, and lending money to debtors.

a. NPLs that can be transferred

All state-owned financial institutions and asset management companies are required to transfer all NPLs falling under the following categories as at December 31, 2000:

• "loss" (required to be written off);
• "doubtful of loss" (requiring 100% provisioning);
• "doubtful" (requiring 50% provisioning); and
• "sub-standard" (requiring 20% provisioning)

Private financial institutions and asset management companies may transfer NPLs to TAMC only under the following circumstances:

• the NPLs are secured by property;
• the debtor which is a juristic entity is indebted to at least 2 Thai financial institutions;
• the total value of NPL owed by a debtor is at least Baht 5 million; and
• no resturcuturing agreement in writing has been entered for the NPL by July 9, 2001, and the NPL is not part of a rehabilitation plan approved by the Bankrupcty Court before June 9, 2001.

Trade creditors, non-Thai banks and their branches are not eligible to transfer their NPLs to the TAMC.

The price of the assets payable by TAMC to the State Banks is the value of the collateral excluding personal guarantees. The rules prescribed by the TAMC Board shall determine the price to be paid if there is no collateral.

The price payable to private banks that opt to transfer NPLs to TAMC is (a) the value of the collateral (excluding personal guarantees), or (b) the book value of NPL less applicable reserve amount, whichever is lesser. Book value here means the total principal amount of the loan as at the date of transfer together with accrued interest for the 3-month period prior to the transfer date.

If the collateral is land, its value is deemed to be the assessment price used by the Land Department in the calculation of land transfer fees.

Profit and loss will be shared as follows:

Profit:

• first 20% - shared equally between TAMC and the financial institution;
• additional profit not exceeding the difference between the book value and transfer price will accrue to the financial institutions;
• any further profits will accrue to TAMC.

Loss:

• first 20% of transfer price – absorbed solely by financial institutions;
• second 20% - equally shared by TAMC and financial institution;
• remaining loss - absorbed by TAMC.

One of the most interesting powers of the TAMC is its ability to restructure the debt by unilaterally amending loan terms, forcing a debt-equity conversion (despite the absence of a similar mechanism under present laws), taking assignments of debts or assets from the debtor to settle debts, and taking transfer of shares or buying issued shares to increase the debtor’s capital. For all these and other measures, only the approval of the TAMC Board is required. Certain procedures required under relevant laws are generally waived.

The TAMC Decree sets forth the rules and procedures of business reorganization separate from those provided under the Bankruptcy Act. The criteria for business reorganization under the TAMC Decree are as follows:

• The debtor must be a limited company, a public limited company or a registered partnership;
• TAMC is a creditor and is owed more than 50% of the debtor’s total debt;
• There is evidence that the business can be carried on and its rehabilitation will benefit the national economy;
• The debtor consents and agrees to be bound by the terms and conditions of business reorganization under the TAMC Decree.

The TAMC Executive Committee appoints the planner who is tasked to draft the plan within the time limit set by TAMC. Once the Executive Committee and the TAMC Board approve the plan, the TAMC shall file a petition with the Bankruptcy Court for it to consider the plan. From the date of court approval of the plan to the completion of business reorganization, the automatic stay similar to that under the Bankruptcy Act is applied.

The plan may require a merger of debtor’s businesses, closure of part of the business, payment of other creditors participating in the business reorganization, and other measures approved by TAMC Board. In these circumstances, certain provisions under the Civil and Commercial Code (CCC) and the Public Company Limited Act are waived.

It has recently been reported in the press that TAMC has already restructured more than Baht 43 billion in debt as of the end of January. These completed cases account for 43% of TAMC’s target of Baht 100 million by March 2002. For the entire year, the plan is to restructure Baht 500 billion out of the total Baht 700 billion received from state and private banks.

The Bank of Thailand, however, has commented that the TAMC cannot totally be credited for all such restructuring. It was disputed that the terms and conditions for restructuring the loans have already been settled between the debtors and creditors under the CDRAC process. Be that as it may, in the backdrop of Baht 1.6 to 1.7 trillion of NPLs, a transfer of Baht 700 billion into the TAMC would hardly make a dent. Of this Baht 700 billion, Baht 610 billion are assets transferred by state banks.

It is thus not surprising to note that bankers do not think of the TAMC as a panacea to the NPL problem. An academic fears that it will be a vehicle to "warehouse" the NPLs forever and sees its value as limited only to the state banks which must get the NPLs off their books.

It is unfortunate that the inherent problems which make NPLs thrive remain, i.e., Thailand’s weak foreclosure and bankruptcy laws, limited security/collateral laws, weak corporate governance standards, deteriorating credit culture, and weak prospects for early economic recovery. Injecting more capital into the system, obviously, is not the answer. Thai banks are sitting on large surplus liquidity, but they have also learned their lessons.