Risk Factors
     In 2003, SME Bank made progress in the development of the Bank’s risk management system, in response to rapid changes in the market and economic environment, and to changes in the Bank’s internal management to become the leading bank for SME development that can respond swiftly to government’s directives. The management of risks was defined in five areas as follows:

1. Strategic Risks
   Throughout the last quarter of 2003, we had been preparing members of staff for impending changes in organizational structure, especially in the credit and SME counseling departments, which were to be organized by “business clusters” in 2004. Business plans were crafted for effective implementation in accordance with the Bank’s strategy and set goals, under consultancy by experts from Thailand Productivity Institute. In addition, we also appointed two committees to draft plans for risk management. The Risk Management Committee was mandated to draft a master plan for overall risk management, while the Information Technology Master Plan Development Committee was mandated to prepare an IT Master Plan specifically. Members of each committee were appointed from the Bank’s directors and external specialists.
2. Credit Risks
   SME Bank defined loan targets and acceptable risks with respect to project financing principles. Consideration of predicted cash earnings takes precedence over pure collateral value. Preparations were made for improvement of portfolio management, in which loan targets were to be assigned for each business clusters, allowing more diversified lending among strategic business sectors. In addition, we developed and improved credit risk rating, by refining the risk factors and associated weights in the existing models to be more in line with current situation. External consultants were contracted to conduct further studies leading to the development of business cluster risks, and to develop guidelines for the use of credit scoring for micro clients in 2004.
3. Market Risks
        Interest rate risks are on a declining trend, as the Bank has restructured its sources of funds to rely less on the inter-bank market by issuing 5-year debenture with fixed coupon rate totaling 5,000 million baht. However, the interest rate risk is considered relatively low because the Bank has diversified its sources of funds. Repayment terms on borrowings were more prudently matched to those of the Bank’s assets.
        Risks from market values of debt and capital instruments are those resulting from venture capital investments. These risks will disappear when the investees become listed on the stock exchange market, or when the assets are repurchased as stipulated in the joint venture agreements.
        During the year 2003, SME Bank did not engage in any transaction of foreign currencies, assets or liabilities, thus was not exposed to currency exchange risks.
4. Liquidity Risks
        SME Bank has put in place an internal control for treasury by forecasting all cash outflows, to identify, measure, monitor, and manage liquidity risks. Since the services provided by the Bank are not very complex by nature, and risk limit is clearly defined for each loan scheme, the Bank is well able to plan ahead for the necessary funding. Moreover, SME Bank has become more widely known among financial institutions. As a result, the financial markets have offered to the Bank credit limits of low-cost capitals in much greater quantities than the Bank’s actual needs. Liquidity risk is thus considered quite low.
        In addition, short-term re-pricing risks of 6 months or less, is not high because the Bank’s factoring loans have short cycles, comparable to the terms where interest rates on new borrowings will be defined.
5. Operational Risks
   We continued to give priority to laying down essential rules, regulations and operational procedures and guidelines to support new services offered, such as leasing and hire purchase, so as to reduce risks from internal operations. A risk management system is initiated to prevent internal fraud, through the launch of P.O. Box 1313, allowing customers and employees to report such information. In addition, the Bank attaches significance to pre-approval credit information review and expedient post-approval audits. The appointed Risk Management Committee is also tasked to provide guidelines and risk management procedures for all departments within the Bank.