Unofficial Translation With the courtesy of the Foreign Banks' Association This translation is for the convenience of those unfamiliar with the Thai language. Please refer to the Thai text for the official version. ------------------------------------------------------------------------ THE BANK OF THAILAND 4 May 2005 To Manager All commercial banks registered in Thailand All foreign bank branches All finance companies and credit foncier companies No. ThorPorTor. ForSorWor. (21) Wor. 797/2548 Re: Regulations for Collateral Valuation of Financial Institutions The Bank of Thailand had stipulated regulations for collateral valuation of financial institutions in the circular letter no. ThorPorTor. Ngor. (Wor) 1837/2541 and no. ThorPorTor. Ngor. (Wor) 1838/2541 dated 2 June 1998 and further made the amendments by the circular letter no. ThorPorTor. SorNorSor. (12) Wor.3522/2543 dated 28 December 2000 and no. ThorPorTor. SorNorSor. (21)Wor.2538/2544 dated 27 November 2001. The substance of amendments made to the regulations on collateral valuation of financial institutions are summarized as follows: 1. To revoke the circular letter no. ThorPorTor. Ngor. (Wor) 1837/2541 and No. ThorPorTor. Ngor. (Wor)1838/2541 dated 2 June 1998 re: Regulations on Debt Restructuring and Regulations on Collateral Valuation of Financial Institutions, the circular letter no. ThorPorTor. SorNorSor.(12) Wor.3522/2543 dated 28 December 2000 re: Regulations on Collateral Valuation of Financial Institutions and the circular letter no. ThorPorTor. SorNorSor. (21)Wor.2538/2544 dated 27 November 2001 re: Regulations on Collateral Valuation and Appraisal of Financial Institutions; 2. To amend the substance of existing regulations as follows: 2.1 amending definition of independent appraiser for further clarity. 2.2 adding regulations requiring financial institutions to disclose policy and procedures on valuation of collateral and immovable properties acquired through debt repayment or public auction to their relevant staff for their acknowledgement and strict compliance. 2.3 amending regulations requiring financial institutions to valuate or appraise all types of collateral on regular basis at least every 3 years except for the case of immovable properties that the financial institutions acquired through debt repayment or public auction, the valuation or appraisal of such cases shall be made on yearly basis. Page 1 of 1
2.4 adding regulations requiring financial institutions to consider impairment or decreased value of assets collateral when there is an indication that such collateral devalued or depreciated by their working lives. 2.5 adding regulations on selection criteria of valuation or appraisal for immovable properties acquired through debt repayment or public auction, which are existing regulations that the financial institutions comply as appeared in Clause 4.4.1(3) of the Notification of the Bank of Thailand re: Worthless or Irrecoverable Assets and Doubtful Assets that may be Worthless or Irrecoverable of Commercial Banks dated 23 August 2004 and in Clause 4.4.1(2) of the Notification of the Bank of Thailand re: Worthless or Irrecoverable Assets and Doubtful Assets that may be Worthless or Irrecoverable of Finance Companies and Credit Foncier Companies dated 23 August 2004. Please be informed and comply accordingly. Yours sincerely, -Signature- Enclosure: (M.R. Pridiyathorn Devakula) Governor Regulations on Collateral Valuation of Financial Institutions Risk Management Policy and Analysis Department Tel. 0-2283-5304, 0-2283-5303 Remark: [ ] The Bank will arrange a clarification meeting on. at. [ x ] No clarification meeting is to be arranged. Page 2 of 2
Regulations on Collateral Valuation of Financial Institutions 1. Rationale of the regulation on Collateral Valuation Since the Bank of Thailand (BOT) issued the regulations on collateral valuation by the circular letter no. ThorPorTor. Ngor. (Wor) 1837/2541 and no. ThorPorTor. Ngor.(Wor)1838/2541 enabling financial institutions to deduct value of collateral appraised in accordance with these regulations from the book value of debtors in order to calculate required provisions for debtors as stipulated in the Notification of the Bank of Thailand re: Worthless or Irrecoverable Assets and Doubtful Assets that may be Worthless or Irrecoverable of Commercial Banks and the Notification of the Bank of Thailand re: Worthless or Irrecoverable Assets and Doubtful Assets that may be Worthless or Irrecoverable of Finance Companies and Credit Foncier Companies, the BOT has amended both notifications on 23 August 2004 by revoking regulations on collateral valuation for collateral that has been valued or appraised over 12 months, as previously prescribed that it can be deducted from outstanding balance before provisioning by no more than 50 per cent of valuation or appraised value. BOT hereby amends the regulations on collateral valuation of financial institutions by prescribing that the collateral are required to be valued every 3 years to be deducted from book value of the debtors before provisioning. Furthermore, the valuation of immovable properties acquired through debt repayment or public auction shall be made on yearly basis in order to recognize their real values. 2. Scope of Application This cirular letter is applicable to all commercial banks under the law governing commercial banking and all finance companies and credit foncier companies stipulated in the law governing finance, securities and credit foncier businesses. 3. Content 3.1 To revoke: 3.1.1 Circular letter No. ThorPorTor. Ngor. (Wor) 1837/2541 and No. ThorPorTor. Ngor. (Wor) 1838/2541 dated 2 June 1998 Re: Regulations on Corporate Debt Restructuring and Regulations on Collateral Valuation of Financial Institutions. Page 3 of 3
3.1.2 Circular letter No. ThorPorTor. SorNorSor. (12) Wor. 3522/2543 dated 28 June 2000 Re: Regulations on Collateral Valuation of Financial Institutions. 3.1.3 Circular letter No. ThorPorTor. SorNorSor. (12) Wor. 2538/2544 dated 27 November 2001 Re: Regulations on Collateral Valuation of Financial Institutions 3.2 Objectives: These regulations on collateral valuation are applicable with: 3.2.1 the valuation or appraisal of collateral assets of all classified assets in accordance with the Notification of the Bank of Thailand Re: Worthless or Irrecoverable Assets and Doubtful Assets that may be Worthless or Irrecoverable of Commercial Banks dated 23 August 2004 and the Notification of the Bank of Thailand re: Worthless or Irrecoverable Assets and Doubtful Assets that may be Worthless or Irrecoverable of Finance Companies and Credit Foncier Companies dated 23 August 2004 so that the value of collateral is used for calculating the provisioning for classified assets; 3.2.2 the calculation of loss incurred from troubled debt restructuring in case where financial institutions select for calculation of new book value of debtors by applying fair value of collateral; 3.2.3 the valuation of immovable properties acquired through debt repayment or public auction. 3.3 Definitions The principal terms and definitions are used in the regulations on valuation of collateral in this circulat letter: Estimating a value means a written statement setting forth an opinion as to the market value of collateral assets or market value of immovable properties acquired through debt repayment or public auction by following proper steps and procedures on valuation to estimate the value of said collateral assets or immovable properties that should be derived when they are sold in the market in transparent manner, by which their characteristics and relevant market condition have been taken into account. In any event, the valuation shall be made in the form of written report. Appraisal means estimating of value conducted by an independent appraiser. Valuation means estimating of value conducted by either an independent appraiser or an in-house appraiser. Market Value means the estimated price of collateral assets or immovable properties acquired through debt repayment or public auctions agreed on by a willing seller and a willing buyer on the date of asset collateral valuation or appraisal under normal trade condition that the seller and buyer having no related Page 4 of 4
interests, the assets or immovable properties having been offered for sale for a reasonable period of time and both parties have agreed to transact with full awareness and free of duress. It shall also be deemed that possession right in the assets under the law may be fully transferred. Generally, costs, acquisition expenses, fees or taxes are not taken into account in deriving the Market Value. Independent Appraiser means (1) an ordinary person and a juristic person undertaking the business of assets appraisal, who is qualified and has suitable professional experience according to the standards and regulations prescribed by the professional association and/or organization supervising the appraiser. They are, in general, responsible for expressing opinions on market value of assts under conditions, limitations and circumstances of the assets market at certain time. The appraiser shall have no relationship with a particular financial institution and is approved by the Securities and Exchange Commission as an appraiser to undertake valuation for public purpose and whose name has never been revoked from the Bank of Thailand s list of approved appraisers of assets of the financial institutions. (2) a financial advisor as approved by the Securities and Exchange Commission for the valuation of shares which are not traded in the Securities Exchange of Thailand or over-the-counter trading. (3) an appraiser as approved by the Bank of Thailand. 3.4 Prescription of Policy and Procedures 3.4.1 Financial institutions are required to prescribe the policy and procedures in valuation of collateral assets and immovable properties that the financial institutions acquired through debt repayment or public auction including regulations on review of the valuation for the abovementioned assets clearly in writing. 3.4.2 Policy and procedures for valuation of assets shall be approved by the Committee of the financial institutions. 3.4.3 Financial institutions are required to disclose policy and procedures in valuation of collateral and immovable properties acquired through debt repayment or public auction to their relevant staff for their acknowledgement and strict compliance. 3.5 Selection Criteria of Appraisal or Valuation 3.5.1 For collateral, financial institution shall comply as follows: (1) Valuation of collateral shall be made by an independent appraiser for debtors with book value exceeding THB 25 million if the financial institutions have capital fund lower than THB 8,000 million and for debtors with book value exceeding THB 50 million if the financial institutions have capital fund exceeding THB 8,000 million. Page 5 of 5
(2) Valuation of collateral for debtors with book value other than that mentioned in Clause 3.5.1(1) shall be made by either an independent appraiser or in-house appraiser. 3.5.2 For immovable properties acquired through debt repayment or public auction, financial institutions shall comply as follows: (1) Where each plot of immovable properties acquired through debt repayment or public auction whose book value exceeds THB 50 million, financial institutions must proceed with appraisal. (2) Where each plot of immovable properties acquired through debt repayment or public auction whose book value is lower than THB 50 million, financial institutions may proceed with appraisal or valuation. (3) Where immovable properties acquired through debt repayment or public auction can not be separately disposed and have an aggregate book value equal to or exceeding THB 50 million, financial institutions shall proceed with the appraisal as similar to Clause 3.5.2 (1). 3.6 Appraisal and Valuation Standards To carry out appraisal or valuation, financial institutions shall comply with the following rules: 3.6.1 Collateral appraisals shall conform to generally accepted appraisal standards and code of conduct set forth by professional asset appraisers associations, such as those used by the Thai Valuers Association and the Valuers Association of Thailand, as minimum standards. If the Securities and Exchange Commissions further prescribes additional standards and code of conduct for assets appraisal in Thailand, financial institutions shall instead comply with those standards. 3.6.2 Report on the appraisal and valuation shall contain sufficient information and clear analysis to support the appraisal and valuation. However, report on appraisal and valuation must be signed by the independent appraiser or in-house appraiser as the case may be. 3.7 Guidelines on Appraisal and Valuation 3.7.1 Financial institutions are required to conduct appraisal or valuation for all types of collaterals regularly at least on every 3-year basis except for the immovable properties acquired through debt repayment or public auction that the financial institutions shall conduct appraisal or valuation on annual basis. 3.7.2 Regulations on appraisal or valuation for each type of collaterals are as follows: (1) Cash or deposits at the lending financial institutions are not required for appraisal or valuation. (2) Near-cash collaterals such as marketable securities both equity securities and debt securities are not required for appraisal or valuation conforming to 3.5.1 (1) but they must be valued by market price which is closing price of Page 6 of 6
each security trading in the Securities Exchange of Thailand or other securities trading centers. (3) Securities that are not traded on an organised market must be appraised or valued depending on book value of debtors as mentioned in 3.5.1 in order to acquire market value as defined in Clause 3.3. If the market value is not available, financial institutions shall take the net worth of the issuer as the appraised value of collateral. (4) Commercial real estate is appraised or valued by applying the cost approach, the direct sales comparison approach, or the income approach. (5) Residential real estate is appraised or valued by applying the direct sales comparison approach. (6) All other collaterals not described in the previous sections (1)-(5), the appraisal or valuation shall be made in accordance with the standards or code of conducts prescribed by the Thai Valuers Association or the Valuers Association of Thailand. If the Securities and Exchange Commissions has further issued standards and professional code of conduct for asset appraisal in Thailand, financial institutions shall comply with that standards and professional code of conduct instead. 3.7.3 Financial institutions shall consider the impairment of or any decrease in value of assets maintained as collateral when there is an indication that such collaterals devalued or depreciated by their working life. 3.8 Independence of Appraiser 3.8.1 Whereby a valuation is carried out by an in-house appraiser, the appraiser must not be involved in to credit granting, investment, and collection of debt repayment as well as have no direct or indirect interest in debtors and the collaterals. 3.8.2 Whereby an appraisal or valuation is carried out by the independent appraiser, the appraiser must be contracted directly by the financial institutions and have no direct or indirect interest in the financial institution, debtors and the collaterals. 3.8.3 Financial institutions are required to establish the appraisal committee comprising of a minimum of three members to consider and approve the independent appraiser including consider and approve the result of appraisal or valuation conducted by both the independent appraiser and an in-house appraiser. Each member of the committee must provide their own opinion on consideration and approval in writing. 3.8.4 Whereby the appraisal committee according to Clause 3.8.3 does not agree with the result of appraisal, the appraisal committee shall comply as follows: (1) In the case where the collateral needs the independent appraiser, the appraisal committee shall not increase or reduce the value appraised by the independent appraiser. However, it may engage a new independent appraiser and opt for any value in between the two values set by two independent appraisers. The appraisal committee shall express its justification in writing. Page 7 of 7
(2) In the case where the collateral does not need independent appraiser, the appraisal committee may increase or reduce the appraised value by which the appraisal committee shall express its justification in writing. 4. Examination by the examiners of the Bank of Thailand In case where examiners of the Bank of Thailand opine that the appraisal or valuation carried out by financial institutions does not comply with the aforesaid regulations or bases on insufficient analysis, inadequate information or lack of supporting documentation, the examiners has the authority to order the financial institutions to decrease the market value as it may deem appropriate. 5. Effective date Regulations on Collateral Valuation of Financial Institutions shall come in force on and from 4 May 2005 onwards. Bank of Thailand 4 May 2005 Page 8 of 8