Special Report -- Rebuilding Asia
ONLINE ORIGINAL: "Malaysia Did It with Force. We Did It with Style" (int'l edition)
Bank of Thailand Governor Chatu Mongol Sonakul on the importance of systemwide change
Chatu Mongol Sonakul manages to be both cerebral and earthy, elliptical and blunt. His royal lineage gives him unusual power to speak freely and act strongly in Thailand. Since taking over as governor of the Bank of Thailand in May, 1998, he has moved to clean up the massive nonperforming loan (NPLs) problem and lay the regulatory framework to ensure that Thailand never again finds itself in such straitened circumstances.
While Chatu Mongol gets high marks for his performance, the challenges remain daunting. NPLs still stand at a staggering 45%, while moves to establish a sound credit and regulatory culture are too often pushed aside by the need to deal with continuing crisis. The latest flap concerns state-owned Krung Thai Bank, previously run by the Finance Minister Tarrin Nimmanahaeminda's brother Sirin and riddled with bad loans between 61% and 84%. Chatu Mongol spoke with Business Week's Mark Clifford in Bangkok earlier this month. Edited excerpts follow.On His Biggest Priority:
We're still trying to put good governance into banks. We [recently] put in the Royal Gazette [a notice] that [bank] owners and managers cannot be borrowers [from their own banks]. It is very structural. It will change the nature of Thai banking. There is a lot of conflict in [most banks] because the compliance and risk officers meet with their bosses and try to control them. Since they cannot control their bosses, they cannot control anyone else. Those conflicts are being taken out.
In terms of corporate governance, we are now coining a word [to describe the concept] in Thai. If you coin a word, that is half the battle. A structure for better corporate governance is not just about individual corporations. It is about the system that links them together.
You have to allow people to operate in a very diversified economy. You have to train people to be more productive.... Those are things that are going in the right direction. It is not as extensive as we would like. We now allow banks to be more competitive. Some of the more advanced banks are opening in the supermarkets until 8 p.m. Some of the others think it is not necessary. They will be killed.On Nonperforming Loans and Legal Sanctions Against Bankers:
[In] a lot of things, we are just more transparent than [other countries]. We are stricter on NPLs than others. Others count less of it or just pay for it up front. A lot of our NPLs are state bank NPLs which we are privatizing and taking out of the banking system. There will be bad bank assets, but they will be taken out of the banking system. NPLs are stationary or going down.
You will see more cases [against bankers] for a long time. We are not trying to sue them for two years and then give it up. It is not a project to sue people for two years, it is a system to retain the effectiveness of the system. In the U.S. [savings and loan case], there were 6,000 cases.
[Here] we never intended it to be [as sweeping]. You had a good advanced economy and a [single] sector going wrong. We did not have an advanced economy in terms of management and governance. The whole country went wrong. There is no point in trying to sue everybody in the country. You only sue those who are blatant and those you have the documents [i.e., evidence to prosecute]. On Continued Restructuring in the Industrial and Financial Sector:
One year ago, I said one-third of [Thai companies] won't be here next year. I would say the same thing today. A lot of industrials are recovering, but I am guessing that one-third of them won't be here next year. Most of our assets are new. That is one of our problems. You [Americans] have it easy -- you can junk the old assets. Thailand has a lot of good assets. We can't get rid of assets. We have to work it out.
Even those [bankers] who have restructured NPLs will get financial and managerial help. The remaining Thai banks are trying very hard. They are computerizing like mad. They are getting rid of people, they are training people. Unless they change the type of ownership, they will not be competitive. If that happens then I think they will have to use a lot of professional people who will become top executives even on the board. On Foreign Banks in Thailand:
I never welcome any, quite frankly. I don't invite foreign banks to come in. I invite investors. Since we don't have much money at the moment, they happen to be foreign banks. I have saved a lot of Thai banks. The five [major Thai banks] are going to the market because I told them to.
[Thai banks] can get capital at any time if they are willing to dilute. There are foreign banks which are now in. Either the Thai banks decide soon to get on with it or they will be dead. Or they hold on for their country to get well again and get a free ride, or they won't make it. I think they will get sensible soon. Foreign banks are coming in sooner than anyone expected. Foreign banks look different. They look very energetic.
On the Thai Currency:
We're doing absolutely nothing to the level of the baht. [But] if people start playing around, we sock it to them. Life as a speculator shouldn't be all roses. You should get a few bumps and bruises from time to time. If [the currency] goes up fast, if it doesn't cost too much, we will try to close [speculative trading] down. Ditto if it goes down fast.
We are not trying to fix the exchange rate. We want to float [the currency] and make it as fixed as possible rather than making it fixed. All floats are dirty. We have never said we will not intervene. We have said we will do it through monetary policy, through interest rates, [and] through active intervention, if it is good for us.
Practically no baht is being traded outside the country. Malaysia did it with force. We did it with style. The cheapest way to stabilize the currency is through supervision. Either you do it by trading, or you do it by beating up the speculators. On the Main Lesson of the Crisis:
Elect a good government. I don't prefer the second alternative which is for the country to unite and do a good job even with a bad government.On Political Uncertainty:
It is a concern. How realistic is the possibility of a bad government? Quite. You have an election with 400 members of parliament. With three in a constituency it was fairly bad. Now, the bet is on one. People will actually see how it works out. It doesn't look very good as far as I can see. When it doesn't look good, there is more pressure on making it good. The more it doesn't look good, the more the press and academics worry. On Krung Thai Bank's Woes:
It's 61% [nonperforming loans] by one count and 84% by another. It's pretty bad, it's very difficult to tell what color of dark gray it is. We spend our days and nights working on it.
The U.S. declared the top 50, in reality the top 200, banks too big to fail. [The thousands which were] shut down were 2.5% of GNP. It took years and years, and it was 2.5% of the banking system. Krung Thai alone is bigger than 2.5% of the banking system. It is something like 10% of the banking system.
On His Biggest Disappointment:
The pace of governance coming in and the effort in putting in good governance. Most people who could do it at the cost of themselves have not done it. The cost may be greater than I evaluated, or maybe they are not as ready to go as they should be. They give themselves a bad name.