Determinants of Bank Lending in Thailand: An Empirical Examination for the Years 1992 to 1996

Thailand experienced some of the world’s fastest economic growth rates over the past four decades until the 1997 Baht devaluation and subsequent financial crisis. The dramatic financial collapse has raised doubts about the general efficiency of the Thai financial system. Until now, empirical knowledge about the lending process or behaviour in emerging markets has been extremely thin due to the lack of appropriate and reliable data. This study, which uses micro level bank data, examines systematic analysis of risk, relationships, and other factors in Thai bank lending decisions to assess the pre-crisis health of the lending process. Specifically, it investigates factors that affect interest rates, degree of lending volume and collateral setting in the loan decision of Thai banks between 1992 and 1996. The results show that Thai banks’ lending decisions follow a similar manner as in developed countries. There are sufficient systematic structures in place, not chaos as speculated by many. Thai banks partly consider borrower’s risk in their lending decision, especially the degree of lending volume but do not make use of these risk indicators in the pricing of loans. Relationship factors are important in Thai bank’s lending decisions. The evidence is more resounding in Thailand than in the developed countries. However, lending to more closely related firms is neither the cause of nor related to bad loan outcome.