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[george]

Narrower interest spreads expected to continue

BANGKOK: -- Interest rate spreads should continue tightening up this year, as banks slash loan rates more aggressively to lure customers, the Bank of Thailand said yesterday.

"The fierce competition in the industry and the interest rate cuts would narrow the interest rate spread in the second half of the year," deputy governor Bandid Nijathaworn said.

Possible increases in non-performing loans would also squeeze the banks' bottom lines. The pressure, however, is minimal, as the figure was 5.5 per cent in May.

The banking system's spread tapered off last quarter due to the slowdown in credit growth. This flattened profits compared with the first quarter.

Bank's profits remained impressive while their capital adequacy ratio was sound, Bandid said.

The central bank is optimistic that the economic recovery along with excess liquidity would help spur credit demand in the near future, particularly for home, personal, creditcard and auto loans.

The banking system's actual reserves were five times higher than the legal minimum, which was more than enough to support loan growth.

The economy had already bottomed out and would return to growth next year, along with inflationary pressure, Bandid said.

Business and household spending should be boosted to supplement government spending because the global economic recovery would take time, he said.

The central bank was ready to introduce further monetary easing if economic risk factors surfaced.

The global economic outlook was uncertain while the financial market was not back on track. And the positive economic scenario would fuel inflation next year.

The central bank insists that the policy interest rate of 1.25 per cent was quite low. It could encourage business and not be an obstacle to economic growth.

"The central bank will continue to monitor domestic demand, quality of assets and businesses' adjustments in the second half of the year," he said.

The central bank would keep steering the baht in line with economic fundamentals and currencies in the region in order to maintain the country's competitive edge.

The baht gained strength last quarter as a result of capital inflows and the current account surplus.

Bandid expects that the second phase of the financial sector master plan would likely be implemented in this half year if the Finance Ministry approves it.

The plan aims to reduce the banking system's operating costs caused by regulations and to promote liberalisation to encourage valueadded business in the industry, such as micro finance.

New players would be promoted, which could be in the form of upgraded local financial institutions or foreign branches with full banking services.

-- The Nation 2009-07-22