How Flawed Is Thailand's Micro-Finance System?

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How flawed is our micro-finance system?
By Wichit Chaitrong
The Nation 2011-05-30

More loans to the poor: are we heading in the wrong direction?

Most political parties have promised small firms and low-income groups access to financial services, but the funding is likely come from taxpayers' pockets.

The Pheu Thai Party has pledged to offer more money - close to Bt100 billion - to double evolving village funds initiated by the Thaksin government, which had handed Bt80 billion to 80,000 villages and communities, each getting Bt1 million.

The Democrat Party has promised to upgrade more village funds to community-bank status and will assign the Government Savings Bank (GSB) and the Bank for Agricultural Cooperatives (BAAC) to provide more loans to the funds.

Such promises have drawn criticism from academic circles and many economists have warned that credit subsidy will add to the public-debt burden.

"I wouldn't agree if the new government gives all 80,000 villages more funds than the Bt1 million each," said Pornchai Thiraveja, acting director of the Financial Inclusion Policy and Development Bureau. Each village has its own economic environment so solutions to their problems might not be the same, he argued.

As of the end of last year, evolving credits of 79,255 villages and communities were Bt124.73 billion.

"I suspect that most of these villages have only figures but not real money available," said Pornchai.

Outstanding loans to small business and low-income groups is estimated at Bt3 trillion, compared with total outstanding loans of Bt11 trillion. It's not only politicians but also officials at the Finance Ministry and Bank of Thailand have tried to promote micro-finance services, as they want all to access financial services.

Bt2.1-trillion Micro-loans

According to the central bank and the Finance Ministry, commercial banks and state-run banks have combined micro-loans of Bt2.1 trillion. Evolving village funds, credit unions and savings cooperatives have loaned Bt1.17 trillion, while independent savings groups have lent Bt33 billion.

The GSB and BAAC have played a greater role in micro-finance services, representing 65 per cent of loans lent by commercial banks and state-run banks. Other state banks like Krung Thai, Small and Medium Enterprise Development Bank of Thailand, Islamic Bank of Thailand and Government Housing Bank have also played important roles.

Commercial banks, including branches of foreign banks and non-banks, have lent only Bt188.28 billion.

The government recently gave Thailand Post the green light to set up banks designed to provide financial services to the poor.

The central bank last week issued rules on micro-finance for commercial banks. It defined micro-finance as a loan not exceeding Bt200,000 per borrower, with interest not exceeding 28 per cent per annum. No minimum income for the borrower has been stipulated.

From politicians' point of view, micro-finance schemes have been successful.

Goanpot Asvinvichit, who heads Chart Pattana Puea Pandin's economic team, said that "as a former chief of GSB, I witnessed the success of village funds".

However, critics have slammed it as a waste of public money and a source of corruption. The UK-based Economist Intelligence Unit ranked Thailand 50th out of 54 countries in its survey of the global micro-finance business environment in 2010, while Cambodia was ranked much higher, at 16th.

It criticised the Thai government for intervening too much in micro-finance services, thus adversely impacting competition and micro-finance development. Other countries that rely much on the market mechanism were praised by the Economist.