AFTER motoring along recklessly on easy profits for years, Thailand's financial industry has discovered the cost of not investing in proper maintenance: a hefty chunk of the loan book has wobbled out of control. The industry will now have to slow down, endure a lot of pain and shed many of the passengers that have partied so well, if not wisely, on easy money. One very senior Thai financier said he expected the 91 finance houses to be halved in number within three years. The 15 commercial banks, though generally in better shape, have a similarly difficult route to travel: for an awkward period of write-offs combined with capital raising beckons. What has really changed, however, is that the authorities and the industry's optimists have been forced to admit that Thailand's domestic lenders are in trouble. What still remains in question is how much pain financial institutions will have to endure before they cleanse themselves of their past excesses. Thailand was lucky after the last, mid-1980s banking crisis, in that it was quickly followed by a period of incredible - I use the word carefully - economic growth fuelled by the diaspora of Japanese factories seeking a refuge from a strong yen. No such boom is currently in the offing: indeed the country may have to go much further in its transformation from a cheap labour economy into some kind of medium-tech centre before it regains its old competitive edge. Last year's shocking zero export growth, though partially blamed on weak global demand, underlined how quickly Thailand must re-invent itself. That is not a happy thought for all the lenders who are a foreclosure away from a decade's worth of unloved, unnecessary and unwanted boom-time investments. The most worrying, but by no means the only, area of over-investment has been property: notably residential and - quickly catching up in the oversupply stakes - commercial property. Banthoon Lamsam, the president of the Thai Farmers Bank, and currently one of the prudent heroes of Thai finance, said last week that everyone should be aware by now that there will be 'some pain involved in the recovery process'. This follows the Bank of Thailand's decision to demand for the first time that banks and finance houses make provisions for substandard loans: 15 per cent and 20 per cent respectively. Loans are considered substandard essentially if borrowers have not paid interest for six months, without sufficient collateral, or 12 months, with sufficient collateral. Lenders are already required to set aside 100 per cent cover for doubtful debts; usually the part of loans that have not paid interest for more than half a year that are not covered by collateral. The government has said this will cost the finance house and banking sectors US$1 billion each over the two years they have to take the provisions. Back of the envelope calculations, using 1996 earnings, suggest this will slash finance house profits in half and knock a quarter off banks' earnings over these two years. This will hurt some more than others: most of the bigger Thai banks, the Bangkok Bank, the Thai Farmers Bank, the Siam Commercial Bank and the Bank of Ayudhya will have to take no extra provisions. The Bank of Asia, the Krung Thai Bank and the Thai Military Bank will have to take provisions worth 45 per cent, 25 per cent and 61 per cent of 1996 earnings. There was no surprise that the Bangkok Metropolitan Bank was quickest off the mark in announcing a rights issue to raise its capital to 15 billion baht from 9.82 billion baht on Friday. Most of the biggest finance houses look sweet on paper: indeed some of them reported that they were 'engulfed' in the billions of baht withdrawn from suspect institutions early last week. If many smaller finance companies go to the wall (in the form of mass mergers organised by the authorities) it might be worth noting that none of the 10 'weakest' houses named by government as requiring immediate injections of capital carried 'a sliver of interest for us', to quote one stockbroker. During Friday's bounce in the market investors were clearly seeking bargains among the better quality lenders like finance house Phatra Thanakit. However, as last weekend's forced merger of the country's biggest finance group, Finance One, with the conservative Thai Danu Bank showed, the pain is not always visible. Finance One's creator, Pin Chakkaphak, was an exceptional US-style bull market investment bank that lost some critical strategic bets. Nevertheless the Thai Farmers Bank president, and every other lender, is keenly aware that property prices must be teetering on the brink of quite a sharp decline. Residential prices, for example, have held remarkably steady in the last three years in face of continued building and estimates that as many as 400,000 homes might lie vacant in the metropolitan area. Some property experts suspect that the bigger property developers have agreed among themselves to hold prices up. 'I can't understand why prices haven't come down. What I do understand is that we could be nearing a crunch point when I don't think the developers can keep them up much longer,' said one veteran property expert. A sharp drop in property prices will be very bad news for lenders for it will wreak havoc with their collateral and expose their borrowers who have been lent more money with which to make their interest payments.