VIII. TRADE AND PROJECT FINANCING Banking System Commercial bank activity dominates the Thai financial system. At the end of 1992, domestic and foreign commercial banks held about two-thirds of all the assets in the financial system. This share was probably the same at the end of 1993, when bank assets totalled 130 billion dollars. There are 29 commercial banks in Thailand, 15 domestic and 14 foreign. U.S. banks with a presence in Bangkok include: American Express Bank, Bank of America, Bank of New York, Bankers Trust, Chase Manhattan Bank, Chemical Bank, CitiBank, Continental Bank, First Interstate Bank of California, Philadelphia National Bank, and Security Pacific Asian Bank. There are four American banks among the foreign commercial banks. No new banking licenses have been issued since 1978. Among commercial banks, the market is heavily concentrated in the domestic Thai banks, which account for about 94 per cent of banking assets. All major Thai banks have correspondent relationships with U.S. banks. Thai commercial banks include Bangkok Bank, Thai Farmers Bank, Krung Thai Bank, Siam Commercial Bank, Bank of Ayudhya, Thai Military Bank, First Bangkok City Bank, Bangkok Metropolitan Bank, Bank of Asia, Thai Danu Bank, Bangkok Bank of Commerce, Union Bank, Nakornthon Bank, and Laem Thong Bank. Foreign banks account for just under 6 per cent of banking assets, and U.S. banks account for about 1.8 per cent. Other financial institutions in Thailand include three government banks and numerous non-bank financial institutions, principally finance companies, life insurance companies and cooperatives. Other banking institutions in Thailand include the Government Savings Bank, the Bank for Agriculture and Agricultural Cooperatives (BAAC) and the Government Housing Bank. These other banking institutions held assets at the end of 1992 worth 11.2 billion dollars, 7.6 per cent of the financial system's assets. At the end of 1992, non-bank financial institutions included 92 finance companies, 18 credit foncier companies (which finance the purchase of real estate), the Industrial Finance Corporation of Thailand, the Small Industries Finance Corporation, 12 life insurance companies, 1,797 agricultural cooperatives, 898 savings cooperatives and 367 pawnshops. Non-bank financial institutions accounted for 32 per cent of the financial system's assets at the end of 1992, valued at 46.8 billion dollars. Thai finance officials plan a gradual liberalization that will open the financial system to more competition, including from foreign banks. Concerns of Thai financial policy makers over trade-offs between increased efficiency through competition on one hand, and the stability of the financial system on the other, are a major factor in the pace of liberalization. Thai financial authorities established the Bangkok International Banking Facility (BIBF) to meet the growing and increasingly complex financing needs of the Thai economy and to promote Thailand as a regional financial center. In March, 1993 the Ministry of Finance and the Central Bank issued 47 licenses to commercial banks to operate offshore banking units under the BIBF. All 15 domestic banks, 12 of the 14 foreign commercial banks already operating in Thailand, and 20 other foreign banks with representative offices in the country received BIBF licenses. By April, 1994 40 banks had begun operations in the BIBF. These banks generated about 9.1 billion dollars in onshore (or "out-in") lending, with foreign banks accounting for 40 per cent of this total. International lending ("out-out" transactions) totalled 5.3 billion dollars, with foreign banks accounting for 45 per cent of the total. Foreign banks, including U.S. banks, already established in Thailand receive the same treatment as domestically incorporated banks in many areas of their operations, although there are also many areas where discriminatory treatment limits their operations. Foreign banks are limited to one office and are not permitted to open new branch offices in Thailand. Foreign banks are not permitted to operate off-site ATMs, which are considered additional branches. Foreign banks are required to maintain minimum capital funds of 125 million baht (about 5 million U.S. dollars) invested in low yielding government securities. The number of expatriate management personnel is strictly limited to 6 persons, which limits foreign banks' operations. Banks that operate BIBF affiliates are allowed to have two additional expatriate personnel. U.S. bankers have cited the lack of qualified managers as a problem which prevents upgrading services. The adverse effect of this restriction is heightened by the difficulty many banks, domestic and foreign, have in hiring and retaining qualified Thai personnel in Bangkok's booming and highly competitive labor market. Foreign banks do not receive national treatment in Thailand. Foreign banks are prohibited from opening branches and are not permitted to operate off-site automated teller machines (ATMs). Recently, regulations were changed to permit foreign banks to participate in the local ATM network. However, they have been unable to negotiate agreements to participate in the ATM network with domestic banks. Foreign banks are required to maintain minimum capital funds of 125 million baht (about 5 million U.S. dollars) invested in low yielding government securities. The number of expatriate management personnel is strictly limited, which limits foreign banks' operations. Thai authorities have announced a plan to allow foreign banks participating in the BIBF to open two offices outside the Bangkok metropolitan area. Details on this liberalization have not been released. In addition, Thailand's offer in the General Agreement on Trade in Services in the Uruguay Round includes allowing up to 5 foreign banks participating in the BIBF to undertake full bank branch business by 1997. The method by which these banks will be chosen is not clear; it is also not yet clear whether that process will be fair and transparent. Foreign Exchange Controls In recent years, the Thai government has implemented a series of measures to significantly liberalize the foreign exchange regime. It accepted the obligations of the International Monetary Fund's Article VIII covering reduction of restrictions of international transactions. Commercial banks were given permission to process all foreign exchange transactions, and substantial increases were allowed in ceilings on money transfers not requiring Bank of Thailand preapproval, and on spending by Thai tourists and business persons abroad. Foreign exchange reporting requirements have been substantially simplified. Banks offer foreign exchange accounts to individuals and businesses. The central bank also raised limits on Thai capital transfers abroad and allowed free repatriation (net of taxes) of investment funds, dividends, profits, and loan repayments. It allowed exports to be paid for in baht without prior permission, and companies to transfer foreign exchange between subsidiaries without having to change those funds into baht. Financing/ Methods of Payment The majority of U.S. firms exporting to Thailand conduct business on a documentary basis, and use various methods of financing such as letters of credit (L/C), drafts, and wire transfers. New-to-market exporters and infrequent exporters should use confirmed, irrevocable L/Cs when initiating relationships with new importers and distributors. Once the importer has established a good payments record and the U.S. firm is satisfied with the character of the importer, it is advisable to give favorable terms. As a standard practice, U.S. exporters to Thailand make their exporting deals more attractive through "draft discounting". This is a simple and relatively inexpensive trade financing technique whereby an exporter is able to provide financing to an importer without the need to utilize the exporter's capital or credit line with the exporter's bank. Often the financing cost is less than what would normally be charged. Notably when a U.S. exporter does not provide financing, the Thai importer/distributor typically obtains 90 to 120 days or longer financing from its local bank at double digit interest rates. By discounting the face amount of the transaction minus interest costs, the U.S. exporter can, however, offer favorable terms and increase his competitiveness. International factoring is expected to be increasingly popular among exporters and importers in the next three to five years. Already widely used in Singapore, international factoring is a method of accounts receivable management whereby a third party assumes responsibility for all the administrative work involved in account collection. Factoring enables exporters to expand sales by offering open account terms of payment while being fully covered against credit losses. Factoring also eliminates administrative costs for credit investigation and receivables management and improves cash flow. Due to the amount of preparation required, international factoring is recommended only for those companies engaged in repetitive, regular sales. It can take 90 to 120 days or longer for Thai importers/distributors to get paid. Thai government agencies typically require longer terms. For example, public hospitals often require 365 days or more. Export Financing/Insurance U.S. bilateral export financing, loan guarantee, and insurance programs are available through the U.S. Export Import Bank (EXIMBANK), the Foreign Credit Insurance Association (FCIA), and the Overseas Private Investment Corporation (OPIC). In 1993 EXIMBANK established "bundling facilities" in Thailand through two U.S. banks and their Thai bank partners -- NationsBank/Bank of Asia and Norwest Bank/Siam City Bank. Bundling is a facility guarantee which creates the ability to offer up to five-year financing for U.S. capital equipment export transactions as low as $50,000 and as high as $5 million. By allowing Thai buyers loans at competitive, less than market rates, bundling should improve a U.S. exporter's ability to make the sale. For information, contact: * Gregory Brusberg, Senior VP & Regional Manager NationsBank - Singapore Branch Office in Bangkok Tel: 66/220-5755 Fax: 66/225-7513 * Louise Hiltner, Assistant VP Norwest Bank, Minneapolis, MN Tel: 612/667-4433 Fax: 612/667-5185 Thailand is a highly attractive major projects market for U.S. firms, and it remains one of the most active markets for EXIMBANK medium/long term loans and bank guarantees. EXIMBANK financing currently covers a variety of major projects in the electric power, petrochemicals, telecommunications, pulp and paper, and transportation sectors. In addition, Multilateral Development Banks can provide financing for projects in Thailand. The Asian Development Bank is a multilateral institution that lends and invests exclusively in the Asian and Pacific countries, as well as selected Central Asian Republic countries. The ADB makes loans and equity investments for economic and social advancement of developing countries; provides technical assistance for the preparation and execution of development projects, programs, and advisory services; promotes investment of public and private capital for development purposes; and responds to requests for assistance in coordinating development policies and plans for developing member countries. The Bank is required to give attention to the needs of the smaller or less developed member countries and give priority to regional, sub- regional and national projects and programs which will contri- bute to the harmonious economic growth of the region as a whole. CONTACTS: U.S. Department of Commerce Liaison Officer to the Asian Development Bank Thomas Jefferson Cultural Center U.S. Embassy Manila Makati, Manila Manila, Philippines Tel: (632) 813-3248 FAX: (632) 816-7684 or Office of Multilateral Development Banks U.S. & Foreign Commercial Service U.S. Department of Commerce, Room 1107 Washington, D. C. 20230 Tel: (202) 482-3399 Fax: (202) 273-0927 The International Bank for Reconstruction and Development (IBRD), a member of the World Bank group makes long-term loans at market related rates primarily to developing nations. The International Development Agency (IDA), the soft loan window of the World Bank, lends to the poorest of the developing countries. Both the IBRD and IDA work to promote broadly based economic growth and frequently focus on structural adjustment, sectoral reform and individual project lending and operate under the same set of procurement guidelines. Typically the World Bank does not finance the entire cost of a project. Rather, it finances the components of a project purchased with foreign exchange, which on average is about 40 percent of the total project cost. Each project may cover a wide variety of sectors and can involve anywhere from one to hundreds of separate contracts providing export business opportunities for suppliers worldwide. CONTACTS: U.S. Department of Commerce Liaison to the U.S. Executive Director's Office International Bank for Reconstruction and Development 1818 H Street, N.W. Room D-13004 Washington, D. C. 20433 Tel: (202) 458-0118 Fax: (202) 477-2967 or Office of Multilateral Development Banks U.S. & Foreign Commercial Service U.S. Deparment of Commerce Room H-1107 Washington, D. C. 20230 Tel: (202) 482-3399 Fax: (202) 273-0927