Banks seen cutting rates very soon

The banking system is expected to reduce interest rates quickly in line with the Bank of Thailand's actions, according to Bandid Nijathaworn, deputy governor for financial institutions stability. Commercial banks have cut rates since the beginning of the year, closely following the central bank's moves, he said.

High excess liquidity and competition in the credit market would lead commercial banks to continue cutting the rates.

''We expect cuts in both lending and deposit rates to occur system-wide in line with their liquidity and the policy rate. Competition in the banking system is fairly high,'' Dr Bandid said.

The Monetary Policy Committee has reduced its benchmark one-day repurchase interest rate by 0.75 percentage points to 4% so far this year. Analysts expected a further cut by 25 to 50 basis points in the next meeting on May 23, to stimulate domestic demand.

Dr Bandid said slowing domestic demand could lower the banking system's credit growth this year. The banking system showed 3.4% loan growth in February, with a 0.4% increase in corporate loans.

The lower interest rate would improve the debt servicing ability of households and increase the asset prices of commercial banks' holdings. ''The banking system's credit growth would depend mainly on the private sector's demand. The lower rates could help spur spending,'' he said.

Dr Bandid said the private sector's credit should grow 8-10% if the economy were to expand by 4.5% and inflation kept at 3-4% this year. Funds raised from the capital market were an additional financing source for the corporate sector in addition to the banking system.

Slower credit growth this year has reflected weak domestic demand and banks' cautious approach toward lending.

''We would rather see banks lend carefully. Credit growth would depend on demand and banks' strategies. Consumption loans have so far grown more rapidly than corporate loans,'' he said.

Dr Bandid said the banking system recorded a slower loan growth rate of 6% in 2006, comprising 3% growth in corporate loans and 20% in consumption loans.

However, the system's profitability remained sound last year thanks to cost-control measures and a shift to the more lucrative retail banking and small and medium-sized enterprise loans.

A decline in gross non-performing loans to 7.4% of total loans outstanding helped improve the banks' profitability at the end of last year.

The system's capital funds currently stand at 14.1% by the BIS standard, well above the 8.5% minimum requirement.

The adoption of the Basel II and the new IAS 39 accounting standards would be the key challenge for the banking system in the coming years, Dr Bandid said.