The debts that won't go away

Your Money - Tuesday December 18, 2007

The debts that won't go away

Rehabilitating bad property assets is a task that's bigger than many people want to acknowledge

NINA SUEBSUKCHAROEN

When the going is good, the wounds of the past tend to be brushed aside as ancient history. Time to move on, say those who are bored by talk about what happened a decade ago when developers and the banks that financed their recklessness went into a free-fall.

While the terms NPL and NPA _ non-performing loans and non-performing assets _ have become entrenched in the vocabulary, many people might think they are ancient history, now that new condos are popping up on every corner.

Not so, says Thanapol Sirithanachai, the managing director of Univentures Plc, which has successfully completed some unfinished condominium buildings including Lumpini Place Watercliff and Grand Park View Asoke.

In fact, the prospect of protracted political wrangling in a weak coalition government after Sunday's election does not bode well at all for the economy next year, he believes. Nor will it be conducive to efforts to resolve the many NPL and NPA problems still in the system.

"If you think about the economy next year, most of the surveys show it won't be better than this year, that's for sure," says Mr Thanapol.

While bullish developers seem to be launching new condos in every promising area of Bangkok and enthusiastic buyers seem to be snapping them up as fast as they come, few want to focus on NPLs and the NPAs they generate.

According to research by Univentures, cumulative lending in the financial system as of June 30 was almost 7.1 trillion baht, of which 322.5 billion baht or 4.55% represented non-performing loans. The figure was up by 14.76 billion baht or 4.8% from the end of 2006. NPLs in real estate as of June 30 totalled 51.95 billion baht or 16%.

The problem is that as more NPLs get resolved in one form or another, a greater proportion of the assets underlying the bad loans become NPAs. Lenders, in other words, become stuck with all types of property that they would like to sell. But few buyers are offering prices the lenders think are fair.

At the end of June, NPAs in the system totalled 324.35 billion baht, up 7.2% from the end of 2006. Most NPAs are vacant land (51%) and commercial buildings (18%). Detached houses, condominiums and townhouses make up 18%.

Mr Thanapol also cautions that the information provided by the Bank of Thailand only covers banks under its supervision, and excludes the specialised state banks overseen by the Finance Ministry, as well as bad assets that are being worked out by various asset management companies. It is for this reason that Univentures compiled its own research, which can be downloaded from http://www.univentures.co.th/

The Bank of Thailand is moving to address the problem by enforcing compliance with IAS 39, the new international accounting standard. Because it requires banks to set aside a reserve equal to the amount of an NPL once a loan turns sour, it's a powerful motivator to be more careful in lending. Otherwise, provisions will continue to eat into profits, to the displeasure of bank shareholders.

Mr Thanapol noted that the central bank also has a policy to reduce overall NPLs in the system to 2% from 4.55% by the end of this year. But this assumes that no new loans will turn bad, and old debts that have been restructured won't slide back into NPL territory.

Importantly, as NPLs decrease, NPAs are increasing because regardless of how NPLs are resolved, some of the underlying assets will turn into NPAs. "Now imagine we have 4-5% NPLs and you push it down to 2% _ it means NPAs will definitely be created," says Mr Thanapol.

The most visible NPAs are the ghost buildings of Bangkok. Univentures quotes a Chulalongkorn University survey showing that as of March 2006, there were 245 buildings on which construction had stalled, down from 508 in 2001.

Among the 245 unfinished buildings there are 85 with only the piling done while 160 are partly constructed. Among the unfinished buildings, 90 have potential as they still have valid construction permits. The remaining 155 are deteriorating in value, with expired permits, no progress and no structure. This type of asset has less value than the unpaid loans against which it was pledged.

"The number of unfinished buildings will continue to increase if developers rush their projects without studying the project feasibility thoroughly or apply for advance permits to avoid legal restrictions," the Univentures report states.

Mr Thanapol says there are buildings that have potential and should be revived, turning non-performing assets into a performing ones.

Univentures itself has built a reputation for taking on some of these challenging revival ventures. It is now negotiating to complete the construction of two more buildings in the central business district after successes with newer ones including Narathorn Place in the Sathon area and Park View Vibhavadi.

How NPLs become NPAs

[B]As things stand today, when borrowers fail to pay interest on their loans for more than three months, these turn into non-performing loans (NPLs). These problem loans can be resolved in many ways but regardless of how they are tackled, the underlying property often becomes a non-performing asset.

Thanapol Sirithanachai, the managing director of Univentures Plc, explained that the first way to resolve an NPL is through debt restructuring whereby a financial institution can come up with a restructuring plan acceptable to both the creditor and the debtor. Remedies include installment repayments, a principal write-down or "haircut", stretching the account payable, performance of obligations and sale for solvency.

If the debtor cannot be contacted or refuses to propose a rehabilitation plan, then compulsory confiscation becomes necessary and settlement is pursued through the courts. A settlement will lead to revocation of NPL status while a civil court ruling will transfer the collateral to the Legal Execution Department, which will be responsible for hosting an auction of the resulting NPA later.In the past, says Mr Thanapol, the banks themselves have bid for NPAs auctioned by the Legal Execution Department, because if outsiders buy at a low price then the banks suffer a big loss. "So banks go and bid to bring it back at a price that they don't have to provision and can survive."

A stark difference between Thai and international banks is that the latter are willing to cut losses and move on, while Thai banks hesitate to sell at a low price because doing so means recording a loss right away, which will necessitate recapitalisation.

However, now that Thai banks are again showing healthy profits, they are more receptive to clearing NPAs from their books more aggressively, he says. "They know that [real estate] is not their business and want to sell, but whereas previously they were not ready to do so, today they are."

Bangkok Post