21 July 2008
The Financial Institution Development Fund ("FIDF") is the government backed institution which protects the deposits of the public with financial institutions in case of bankruptcy or closure. However, the Institutes of Deposits Protection Act B.E. 2551 (2008) ("Act") which will become effective on 11 August 2008, will limit the amount of the guaranty with the use of a systematic tier approach. The Act will effectively reduce the burden of the Thai Government.
In Thailand at present, the full amount of monies deposited in Thai banks is fully guaranteed by the FIDF. This measure was adopted by the Thai Government in 1997, in the midst of Thailand's greatest economic crisis. It was a move taken to regain and increase public confidence in the Thai banking system. As a result of this measure, depositing in commercial banks is believed to be one of the most secure ways of keeping and saving monies.
The Act may change this perception. The Act was published in the Royal Gazette on 13 February 2008 and will become effective 180 days from its publication, i.e. 11 August 2008. It defines, imposes and sets out some provisional measures which will alter the statuses of financial institutions in Thailand including the security, stability and safety of deposits held by financial institutions.
Systematic Tier Approach
The Act establishes the Institute of Deposit Protection ("IDP"), classified as a juristic person, which will control the Deposit Protection Fund. The IDP has an initial capital of THB 1 Billion.
Under the Act, all kinds of THB resident deposits with financial institutions, i.e. commercial banks, finance companies and credit foncier companies, including the outstanding accrued interests from such deposits until the day those financial institutions have had their operation permits revoked, are protected.
However, instead of the full amount, the maximum amount that IDP will guarantee per depositor per financial institution is THB 1 Million, regardless of the number of accounts owned by the depositor. In order to adapt gradually, this Act provides a transitory provision which covers the first four years of the Act as follows:
First year Full amount protected
Second year THB 100 Million protected
Third year THB 50 Million protected
Fourth year THB 10 Million protected
Fifth year onwards THB 1 Million protected
According to the Bank of Thailand ("BOT"), only an estimated 1.23 percent of depositors have deposits of more than THB 1 Million per account. As such, BOT believes that only these depositors will be affected by the Act, leaving the majority of the depositors unscathed. However, the data used by BOT is per account, and not per financial institution as prescribed by the Act. This means that BOT excluded from its statistics depositors who had total deposits of more than THB 1 Million spread in several account deposits with a financial institution.
The Act will greatly affect the credibility of financial institutions in Thailand. It may encourage depositors to seek alternative ways to safeguard and invest their money.
From the effective date of this Act, any person who holds resident THB deposits of more than THB 1 Million in a financial institution must reconsider the security and the returns of maintaining those accounts. Savings in commercial banks will no longer be fully protected (subject to a 5 year scale) and will go from a "low risk, low return" investment to "high risk, low return" investment.
To reduce the impact of this Act, depositors may consider spreading their deposits with different financial institutions, and ensuring that the amount deposited does not exceed THB 1 Million per financial institution. The excess amounts may be placed with different financial institutions or in other forms of investment, such as the equity market.