As part of the government’s third relief package, the Bank of Thailand (BOT) proposed in principle to the economic cabinet on Friday to reduce the amount commercial banks pay into the Financial Institutions Development Fund (FIDF) from 0.46 per cent to 0.23 per cent per year.
The lowered rate will be kept for 2 years, while the percentage applies to average deposits protected by the Deposit Protection Agency (DPA).
Another measure is to maintain the deposit guarantee at 5 million baht for another year.
BOT’s governor Veerathai Santiprabhob commented that the policy interest rate has already been cut two times in the past month to 0.75 per cent, however, “the FIDF contribution might be the extra cost that is keeping commercial banks from lowering their interest rates,”.
As of January, the total amount of deposits within commercial banks was worth 14.11 trillion baht.
Initially, the DPA was supposed to reduce the deposit guarantee down from 5 million baht to 1 million baht in August 2020. This move would impact many, since deposits of up to 5 million baht account for 99 per cent of the total. The reduction could now be postponed until August 2021, which is pending cabinet approval next Tuesday.
The DPA had been set up as a result the Asian financial crisis in 1997 to provide protection for deposits at commercial banks, with the banks contributing 0.01 per cent of their deposit base back to agency in return each year. On top of that, banks will have to also contribute 0.46 per cent to the FIDF each year as an insurance against the threat of another financial crisis.
As of January, the total deposit within the commercial bank system was at 14.11 trillion baht — most of them at 1 million baht or less. Based on this amount, the annual obligation to FIDF at 0.46 per cent will now be at 140.9 billion baht.
If the BOT reduces its contribution to 0.23 per cent, banks will have at least 70.5 billion baht head room to offset reduction in income as they could use that to lower lending rates to distressed borrowers.
Maria Lapiz, Managing Director and Head of Institutional Research at Maybank Kim Eng Securities said some may “interpret this as potential profits to the banks,” to which she disagrees.
Lapiz believes that by utilizing this mechanism, banks will now be compelled to actively participate and help distressed borrowers. Another implication is that the BOT has possibly come up with a better approach on how to get banks to participate actively — something which the central bank has failed to do so thus far via cutting the benchmark lending rate, she added.
