Consultative Group to Assist the Poorest (CGAP) Working Group on Savings Mobilization BANK FOR AGRICULTURE AND AGRICULTURAL COOPERATIVES (BAAC), THAILAND (CASE STUDY) Delbert Fitchett Eschborn, 1999 CGAP Working Group on Savings Mobilization Bank for Agriculture and Agricultural Cooperatives (BAAC), Thailand - Case Study ii CONTENTS ABBREVIATIONS iv LIST OF TABLES/GRAPHS v 1 CONTEXT 1 1.1 Macroeconomic context 1 1.1.1 A period of economic growth and stability (1986-1996) 1 1.1.2 The Thai rural economy 2 1.1.3 Advances in alleviating rural poverty in recent years 2 1.1.4 The financial and economic crisis since mid-1997 3 1.2 Financial sector context 4 1.2.1 Role of the central bank 4 1.2.2 General development of the banking sector 5 1.2.3 Outreach and characteristics of state financial sector interventions 5 1.2.4 Social security system 5 1.2.5 The crisis in the financial sector 6 1.3 Classification of the macroeconomic, financial and socio-cultural context 6 2 INSTITUTIONAL ANALYSIS 7 2.1 Rural financial markets in Thailand 7 2.2 General characteristics of BAAC 7 2.2.1 Trends in BAAC savings mobilization 7 2.2.2 Trends in agricultural lending 8 2.3 Institutional type, governance and organizational structure 8 2.3.1 Institutional type and governance 8 2.3.2 Organizational structure 9 2.3.3 Lessons learned in institutional type, governance and organizational structure 11 2.4 Demand-oriented savings products and technologies 13 2.4.1 Characteristics of demand-oriented savings products and technologies 16 2.4.2 Design of demand-oriented savings products 16 2.4.3 Lessons learned in the design and handling of demand-oriented savings products and technologies 17 2.5 Management capabilities 18 2.5.1 General management capabilities 18 2.5.2 Special management capabilities: Risk management 18 2.5.3 Special management capabilities: Liquidity management 21 2.5.4 Lessons learned in management capabilities, especially risk and liquidity management 21 2.6 Regulatory and supervisory framework 21 CGAP Working Group on Savings Mobilization Bank for Agriculture and Agricultural Cooperatives (BAAC), Thailand - Case Study iii 2.6.1 External regulation and supervision mechanisms 21 2.6.2 Internal regulation and supervision mechanisms 22 2.6.3 Analysis of lessons learned in external and internal supervision and regulation mechanisms 22 2.7 Cost analysis of savings mobilization 23 2.7.1 Scope and quality of accounting and cost analysis 23 2.7.2 Methodologies to keep operating and transaction costs low for the financial institution 23 2.7.3 Methodologies to keep transaction costs low for savers 24 2.7.4 Analysis of lessons learned in the reduction of operating and transactions costs for the financial institution and the savers 24 2.8 Impact of the financial and economic crisis on BAAC 25 3 CONCLUSIONS 27 4 REFERENCES 29 5 ANNEXES 30 5.1 Annex 1: Macroeconomic, financial and social data 30 5.2 Annex 2: Institutional data 30 5.3 Annex 3: Performance indicators 31 CGAP Working Group on Savings Mobilization Bank for Agriculture and Agricultural Cooperatives (BAAC), Thailand - Case Study iv ABBREVIATIONS ADB Asian Development Bank ATM Automatic Teller Machine BAAC Bank for Agriculture and Agricultural Cooperatives BMZ Bundesministerium für wirtschaftliche Zusammenarbeit und Entwicklung BOT Bank of Thailand Bt Baht CGAP Consultative Group to Assist the Poorest FRA Financial Sector Restructuring Agency FY Fiscal Year GDP Gross Domestic Product GHB Government Housing Bank GOT Government of Thailand GPP Gross Provincial Product GSB Government Savings Bank GTZ Deutsche Gesellschaft für Technische Zusammenarbeit GmbH IBRD International Bank for Reconstruction and Development IFAD International Fund for Agricultural Development IFCT Industrial Finance Corporation of Thailand IMF International Monetary Fund JLG Joint Liability Groups KfW Kreditanstalt für Wiederaufbau MFI Microfinance Institution MOF Ministry of Finance NGO Non-governmental Organization NPL Non-performing loans OAG Office of the Auditor General CGAP Working Group on Savings Mobilization Bank for Agriculture and Agricultural Cooperatives (BAAC), Thailand - Case Study v OECF The Overseas Economic Cooperation Fund, Japan OSTC Om Sap Thawi Choke RBAD Regional Branch Administration Department SDI Subsidy Dependence Indicator SHG Self-Help Group SOE State-owned Enterprise TRIS Thai Rating and Information Service USAID The US Agency for International Development LIST OF TABLES/GRAPHS Table 1: Per capita gross provincial product 2 Table 2: Percentage of the population living below the poverty line 3 Graph 1: Organigram of BAAC 10 Graph 2: BAAC delivery structure 11 Table 3: Deposit to loan ratio FY1986-1996 14 Table 4: Interest rates on deposits (% p.a., Nov. 1996) 14 Table 5: Size distribution of savings deposits, March 1997 15 Table 6: Indicators on savings outreach 16 CGAP Working Group on Savings Mobilization Bank for Agriculture and Agricultural Cooperatives (BAAC), Thailand - Case Study 1 1 CONTEXT 1.1 Macroeconomic context 1.1.1 A period of economic growth and stability (1986-1996) Even by the impressive standards set in Southeast Asia, in recent years, Thailand has exhibited one of the most enviable records of economic growth. From an economy based on a relatively narrow range of primary commodity exports - rice, rubber, tin and teak - the country has developed a much more broadly based production and export base. During the period 1986 to 1996, real Gross Domestic Product (GDP) grew at an annual rate of almost 10% and real per capita income more than doubled, so that by 1996, GDP per capita had risen to about US$3,100. 1 This remarkable growth performance has been based on both favorable external factors and sound policy fundamentals, including prudent fiscal management, aggressive export promotion, trade policy liberalization and market-friendly policy interventions. These were bolstered by well-conceived public sector investment programs in human capital and physical infrastructure. The prudent fiscal, monetary and trade policies that underpinned this period of rapid growth resulted in relative price stability. Since the early 1980s, this rapid growth has considerably transformed the Thai economy. During this period, the manufacturing sector expanded rapidly, propelled by rapid export growth. Concurrently, while agricultural output continued to grow, the sector's share in total GDP fell by half, to about 10%, while industrial output rapidly grew to represent 38% of GDP by 1995. This growth in overall output has been accompanied by a relatively rapid growth in employment, although the sectoral distribution of the labor force has considerably lagged in adjusting to the change in the sectoral distribution of output; by 1994, some 20 million persons - about 58% of the labor force - were still engaged in agricultural activities. With progressive implementation of trade liberalization policies during and since the 1980s, the economy has become increasingly outward-oriented. Export growth (in real terms) averaged over 17% p.a. in the period 1987-1995, rising to represent about 42% of GDP. The structure of exports has also changed, with an increasingly diversified range of manufactured goods rising from about one-third of the total exports a decade ago to over two-thirds by the mid-1990s, sharply eroding the share of agricultural exports. Also during this period, domestic savings represented a relatively high share of GDP. Nevertheless, high rates of private and public sector capital formation led to recourse to external savings and a consequent increase in external debt. The total area of Thailand is 513,115 square kilometer, while the 1996 population was 60.4 million - resulting in a population density of 118 per square kilometer. The population growth rate in recent years has fallen to about 1.5%. About one-fifth of the population lives in urban areas, primarily in the Bangkok metropolitan area. Living standards vary widely between the different regions of Thailand, demonstrated by the following World Bank estimates of the respective levels of per capita gross provincial product (GPP). 1 In current US$, based on the estimated 1996 GDP growth rate. CGAP Working Group on Savings Mobilization Bank for Agriculture and Agricultural Cooperatives (BAAC), Thailand - Case Study 2 Table 1: Per capita gross provincial product Region 1994 per capita GPP (US$) Northeast 805 North 1,235 South 1,582 Central 2,767 Bangkok and vicinity 7,402 Whole Kingdom 2,438 Source: World Bank (1996). 1.1.2 The Thai rural economy The country is comprised of four main upland regions in the west, north, north-east and south-east, surrounding a large central plain. • The western hills (up to 900 meters) are formed by a series of north-south ridges covered by monsoon forest. • In the northern uplands, altitudes are higher than in the west (up to 1,500 meters). Natural vegetation has deteriorated due to shifting cultivation. • The north-eastern plateau is mostly of a lower altitude than the western and northern uplands. Owing to lower rainfall, it is less suitable for agriculture, other than in the irrigated areas. • In the south-east uplands, the rainfall is highest and the altitude is moderate. • The central plain, which is well served by a natural water system, has fertile alluvial soils and is the most important region for agricultural production. 44.6% of the Thai surface is classified as productive agricultural land. Presently about 38% - some 20 million hectares - of the country's area is used for agricultural purposes. One-third of the cultivated area is irrigated. About one-half of the area is in paddy, one-quarter under other field crops and the remainder in tree crops. Agriculture is centered mainly on the Central Plain, which produces most of the country's rice. Principal crops in the upland areas are maize, cassava, cotton and pineapple. In recent years, such high-value activities as vegetables, horticulture and shrimp farming have also expanded rapidly. In the southern region of Thailand, rubber production has expanded at the expense of the timber resources. During the past five years, agricultural GDP has grown at an appreciable rate, although at a lesser pace than the non-agricultural sectors. Overall, the main agricultural products are sugar cane, cassava, rice, maize, and rubber, while the principal agricultural exports are rice, cassava, maize and vegetables. In addition to these farming activities, non-agricultural activities provide an increasingly important source of income in rural areas. For agricultural households, non-farm production accounted for 42% of total income in 1994, compared to only 9% in 1975. 1.1.3 Advances in alleviating rural poverty in recent years The impact of the structural transformation of the agricultural sector in recent years has been notable. With rising rural incomes, new employment opportunities in urban areas and increased public investment in the rural infrastructure, poverty in remote areas has fallen. CGAP Working Group on Savings Mobilization Bank for Agriculture and Agricultural Cooperatives (BAAC), Thailand - Case Study 3 The farmers who have benefited most during the last decade are the small and medium farmers who produce cash crops, which account for 50% agricultural GDP (sugar, pineapples, rubber, vegetables for processing, poultry, and pigs). Small-holder farmers (especially rice producers), who account for the remaining 50% of agricultural GDP and make up the majority of farmers, have shared to a lesser extent in the growing rural prosperity. The relatively more rapid growth of employment opportunities and incomes in the principal urban areas - especially Bangkok - has motivated many rural dwellers to migrate in search of higher incomes. This movement has been of both a permanent and temporary nature, depending on the seasonal rhythm of farm work. The combined result of these various forces has in recent years led to important reductions in the incidence of poverty in many parts of the country: Table 2: Percentage of the population living below the poverty line Region 1988 1990 1992 1994 North 31.6 22.2 24.7 12.6 Northeast 42.1 33.5 38.0 22.8 Central 21.7 17.2 11.7 7.5 South 35.6 29.5 21.9 19.0 Bangkok vicinity 7.0 3.0 1.7 1.2 Whole Kingdom 29.9 23.5 23.1 14.3 Source: Kakwani and Krongkaew (1997). 1.1.4 The financial and economic crisis since mid-1997 The rapid economic development of the country came to a halt in mid-1997 with the outbreak of the severe financial and economic crisis that affected most countries in Southeast Asia. The Asian financial crisis had its origin in Thailand when the Thai Baht came under speculative pressure and the government decided to float the currency in July 1997. The main problem was the private sector's foreign debt that came with an intricate web of connections among family-owned corporations, banks and the government. In the two years preceding the crisis, the country saw more foreign loans pouring in than in the entire decade before. The bulk of the cheap and easy money, however, was not hedged against the currency risk. As a consequence, the currency plunged from 25 Baht to a low of 56 Baht against the US dollar in January 1998. The IMF was called in for assistance but the bail-out package of US$17 billion and the associated reform measures have not brought the expected results. What was diagnosed as a currency crisis transformed into a solvency crisis in the financial system that rapidly spread to all economic sectors. The economy contracted by 0.4% for the whole of 1997 and shrank further by around 6% to 8% in 1998. Unemployment is expected to double to more than two million people. The rate of inflation also increased to over 8% at the end of 1998. The situation has somewhat stabilized but the economy is far from recovery. It is still too early to fully assess the impact of the crisis. The value of the Thai currency recovered to around Bt36 against the US dollar in the course of 1998. However, a fundamental improvement cannot be expected unless the root causes of the problem are tackled - and these root causes lie in the financial sector. CGAP Working Group on Savings Mobilization Bank for Agriculture and Agricultural Cooperatives (BAAC), Thailand - Case Study 4 1.2 Financial sector context A wide variety of financial institutions has evolved in Thailand; most are privately owned. In terms of asset size, geographical coverage and roles in mobilizing savings and financing the economy, commercial banks are the leading participants in Thai financial markets. Second in size are finance companies, which mobilize deposits from the public by issuing promissory notes, credit foncier (mortgage) companies, mutual fund management companies, savings cooperatives and life insurance companies. Finally, additional financial market participants include a number of specialized financial institutions established by the Government of Thailand (GOT) for various development purposes, including the Government Savings Bank (GSB), the Government Housing Bank (GHB), the Bank for Agriculture and Agricultural Cooperatives (BAAC) and the Industrial Finance Corporation of Thailand (IFCT), inter alia. 1.2.1 Role of the central bank The Bank of Thailand (BOT) was established in 1942, to become the country's Central Bank, acting as the note-issuing authority, banker to the GOT and financial institutions, and agent for the government in dealing with international monetary organizations. Currently, all commercial banking businesses in Thailand are regulated by the BOT. The Commercial Banking Act of 1962 (as amended) authorizes the Ministry of Finance (MOF) and the BOT to issue notifications to financial institutions in various matters, e.g., prudential requirements and reporting standards. State-owned specialized banks, i.e., the GSB, the GHB and BAAC, are not under the supervision or regulation of the BOT. The BOT is also authorized by the MOF to manage public debt and official international reserves, to administer exchange controls, and to supervise commercial banks, finance companies, finance and securities companies and credit foncier companies. Finally, the BOT is responsible for conducting domestic monetary policy to achieve sustainable economic growth with stability. With respect to the supervision of commercial banks, finance companies, finance and securities companies and credit foncier companies, the objective of the BOT is to ensure the soundness and solvency of these financial institutions. At the same time, the BOT strives to allow them to develop and operate more efficiently under market mechanisms, while upgrading them to meet international standards in line with the process of financial globalization. 2 In this respect, the BOT operates the Financial Institution Development Fund to provide financial and managerial assistance to financial institutions facing difficulties. 3 In addition to the traditional "lender of last resort" function of the BOT, it also operates refinancing facilities that provide credit to "priority" sectors, through the commercial banks, IFCT and specialized banks, at concessional interest rates. This latter function has, however, become of less importance in recent years. The BOT also monitors and enforces the credit portfolio allocation rules for the commercial banking system. 2 The banking and finance sector under the purview of the BOT has experienced several serious problems with respect to proper management (e.g., the Bangkok Bank of Commerce case) and possible bankruptcy (property finance companies) in recent years. As the financial sector has become more diversified and a variety of new products introduced in recent years, the regulatory and supervisory burden on the BOT has clearly become more complex. In these circumstances, international rating agencies have downgraded several Thai banks in recent months. 3 As pointed out later, there is no formal deposit insurance mechanism operating, although the actions of the GOT/BOT in response to recent financial difficulties in some banks and financial agencies have demonstrated an implicit deposit guarantee policy. In important respects, such an approach may inject considerable uncertainty into the calculations of both bank depositors and bank management; an explicit, risk-based, contributory deposit insurance fund for participating banks may deserve serious consideration on the part of the authorities. CGAP Working Group on Savings Mobilization Bank for Agriculture and Agricultural Cooperatives (BAAC), Thailand - Case Study 5 1.2.2 General development of the banking sector Commercial banking first came to Thailand in 1888, with the establishment of the Hong Kong and Shanghai Bank branch. Other foreign banks arrived in the next decade, and the first domestic commercial bank was chartered in 1906. By the mid-1990s, there were 15 Thai commercial banks (with some 3,000 domestic branches and 49 overseas branches) and 14 foreign bank branches, as well as 44 bank representative offices in Thailand. Total deposits of the commercial banking system, in mid-1996, amounted to US$138 billion, about 63% in the metropolitan Bangkok area and the remainder in the rest of the country. Most commercial banks provide a wide range of financial services to their clientele, e.g., all branches are on-line, ATMs are widespread (apparently an important marketing device), payroll direct deposit services are available, etc. 1.2.3 Outreach and characteristics of state financial sector interventions As befits a rapidly growing, transforming economy, the financial services sector is broad and diverse. While the Bank of Thailand has followed a relatively conservative monetary policy in general, in recent years, it has presided over a relatively rapid increase in the money supply for credit expansion. There has been considerable movement in the deregulation of the financial sector, although mandatory credit allocations are still enforced for (increasingly more broadly defined) "priority" sectors. Formal controls on interest rates have been removed, although the BOT continues to exercise close discipline through policy instruments and "moral suasion." While the operations of foreign financial institutions were relatively restricted in the past, the authorities are now aiming to establish Thailand as a regional financial center, extending licenses to overseas banking institutions to provide offshore banking services. In this process, domestic banking institutions are instituting international standards of accounting, reporting and capital adequacy. With respect to the oversight and regulation of the domestic banking sector, the BOT has occasionally appeared to move slowly in both detecting questionable banking practices and in taking measures to correct situations once they have been detected. Specific examples of this tendency include serious problems with finance and security companies in the mid-1980s, deteriorating portfolios of property finance companies in the mid-1990s, and a case of mismanagement and possible fraud leading to the collapse of a major commercial bank. In these instances, the BOT moved to the rescue of troubled firms with public funds in order to divest the troubled firms of depressed assets. However, the BOT's weaknesses became most apparent in the context of the severe financial crisis since mid-1997, which induced major changes. In fact, the crisis has forced a shift in the nature of the BOT's role from the past's relatively reactive and formalistic enforcement of rules to a more proactive and timely assessment of financial institutions' procedures and practices. 1.2.4 Social security system There is no system of social security or old-age pensions with universal coverage. In the past, government and state-owned enterprise employees received pensions on their retirement, while some large private firms also provided some retirement benefits. This panorama was altered in 1995, when the GOT enacted laws supporting the establishment of privately-managed provident funds based on a combination of employee and employer contributions. Similar defined-contribution provident funds are also being established for [...]... Bank for Agriculture and Agricultural Cooperatives (BAAC), Thailand Case Study 6 CGAP Working Group on Savings Mobilization 2 INSTITUTIONAL ANALYSIS 2.1 Rural financial markets in Thailand In addition to the Bank for Agriculture and Agricultural Cooperatives (BAAC), there are 15 commercial banks that provide financial services in rural areas of Thailand Most of these commercial banks concentrate on... strains on and inconsistencies for its fiduciary responsibility to its expanding and increasingly sophisticated private depositor base These political agendas mandate such questionable practices as unreasonably low (i.e., loss-inducing) interest rates on farmer loans and distraction of staff time and resources into ancillary non-banking Bank for Agriculture and Agricultural Cooperatives (BAAC), Thailand Case... capital, such public trading of the bank stocks provides an ongoing and transparent market-based assessment of the financial performance of the banking institutions Bank for Agriculture and Agricultural Cooperatives (BAAC), Thailand Case Study 22 CGAP Working Group on Savings Mobilization 2.7 Cost analysis of savings mobilization 2.7.1 Scope and quality of accounting and cost analysis Until very recently,... district level Bank for Agriculture and Agricultural Cooperatives (BAAC), Thailand Case Study 9 CGAP Working Group on Savings Mobilization Graph 1: Organigram of BAAC BOARD OF DIRECTORS Land Fund Committee Executive Committee Office of Technical Service and Planning Secretariat Land Fund Office Public Relations Programme and Budget Office of Audit and Inspection Technical Services Finance and Accounting... and work Therefore, a comprehensive and conclusive assessment of the crisis and its impact on BAAC would be premature at this point in time Bank for Agriculture and Agricultural Cooperatives (BAAC), Thailand Case Study 28 CGAP Working Group on Savings Mobilization 4 REFERENCES BAAC, Annual Reports, Bangkok 1986-1996 Bangkok Post, Economic Review, Year-End 1996, Bangkok 1997 Bank of Thailand, Financial... as it does not provide for a return on BAAC's own capital base Bank for Agriculture and Agricultural Cooperatives (BAAC), Thailand Case Study 24 CGAP Working Group on Savings Mobilization • Commercial banks that did not achieve the BOT-mandated priority sector lending targets were obliged to deposit their respective shortfalls with BAAC 23 • Concessional loans and grants from foreign sources, though... assignment with a well-known microfinance institution, BancoSol Bank for Agriculture and Agricultural Cooperatives (BAAC), Thailand Case Study 18 CGAP Working Group on Savings Mobilization • Default risk, which requires careful selection and screening of clients, enforcement of credit discipline, monitoring of loan performance and adequate provisioning for doubtful loans In its operations, BAAC senior management... There is no regular provision for evening or weekend banking services Bank for Agriculture and Agricultural Cooperatives (BAAC), Thailand Case Study 17 CGAP Working Group on Savings Mobilization 2.5 Management capabilities 2.5.1 General management capabilities According to BAAC enabling legislation, the President must have expertise in either banking, economics, agriculture, cooperatives or law The President... short courses in Thailand and overseas, and post-graduate courses in both Thailand and abroad Training is also provided to members of agricultural cooperatives and farmers' associations While training can play an important role in maintaining and upgrading BAAC's human capital base, care must be taken to avoid excessive managerial "inbreeding."12 An effort should be made to recruit middle and upper management... assessing their creditworthiness as potential borrowers With respect to procedures for opening a regular passbook account, these are also straightforward and not time-consuming - although there appear to be some occasional problems of peak usage and waiting lines in Bank for Agriculture and Agricultural Cooperatives (BAAC), Thailand Case Study 16 CGAP Working Group on Savings Mobilization the branches.11 . Group on Savings Mobilization BANK FOR AGRICULTURE AND AGRICULTURAL COOPERATIVES (BAAC), THAILAND (CASE STUDY) Delbert Fitchett Eschborn, 1999 . Mobilization Bank for Agriculture and Agricultural Cooperatives (BAAC), Thailand - Case Study 5 1.2.2 General development of the banking sector Commercial banking