4. Implications of Impaired Credit Flows
Problems in the banking sector as well as necessary restructuring in the corporate sector has contributed to sluggish loan growth that has persisted despite the pickup in activity. The anemic growth in private credit has its roots in the 1997 crisis, which caused a dramatic contraction of the banking sector. Subhaswasdikul and Nakornthab (2003) show that the contraction in bank lending during the early stages of the crisis was predominantly supply-driven, as banks’ balance sheets deteriorated rapidly. Subsequently, demand factors, including large excess capacity and subdued investor confidence, have contributed to the sluggish growth in credit. At the same time, there appears to be a fundamental shift in banks’credit extension policies from relationship-based lending towards more risk-based lending. While this development is clearly welcomed, it hampers credit growth in the short-term by reducing banks’ willingness to lend. The pertinent question at this juncture is to what extent the contraction in bank lending has affected/reflected developments in the real economy. Indeed, as will be discussed below, much of the salient features of Thailand’s recent macroeconomic development outlined in Section 2namely, low inflation, low real interest rates, and an asymmetric growth pattern-can be rationalized from a financial sector perspective.