Banks wary of BOT's proposed debt relief criteria
The Bank of Thailand (BOT) is poised to issue three guidelines to reduce household debt – which rose to 16 trillion baht or 90.6% of GDP in the first quarter, from 86.3% last year.
The central bank said it will propose guidelines on responsible lending, risk-based pricing, and macroprudential policy at the end of this month. It will then seek feedback on the guidelines from stakeholders.
The risk-based pricing guideline will encourage creditors to set interest rates based on the debtor's risk level rating. This is expected to open more loan opportunities and reduce off-system (loan shark) borrowing at high interest.
The macroprudential guideline aims to provide debtors with credit in line with their income or repayment capacity while expanding debt relief measures by another 30% to combat long-term household debt.
However, banks warn of higher non-performing loans (NPLs) unless the BOT guidelines include suitable interest rates for high-risk groups.
Financial institutions also fear that granting loans based on the debtor's repayment capacity will result in more people turning to loan sharks, which could affect banks’ lending growth.
The Thai Bankers' Association (TBA) said that its members view the proposed measures as a responsible lending framework.
They responded positively to the idea of interest rate reductions for “good debtors”, plus higher interest for high-risk groups. However, they said interest rates must be set at a level that allows banks to lend and compete, covering potential risks and providing interest rates accessible to debtors but lower than off-system lenders.
Setting credit criteria based on the debt service ratio (DSR), or the debtor's ability to repay, is seen as a potent remedy but may have the unintended consequence of preventing debtors who cannot access credit from resorting to off-system borrowing, the TBA said.
The resolution of long-term debt problems should start with cooperative loans and off-system debts with high-interest rates, it added.
Long-term debtors also require clear information and solutions, otherwise new long-term debt will constantly flow into the system, said the TBA.
Furthermore, proposals to address blacklisted debtors who cannot repay within four years are considered harsh by the TBA. Previously, these were not considered non-performing debts. But if the holders are blacklisted in the credit database, it may hinder their access to credit in the future, affecting their livelihoods.
To be sustainable, household debt solutions must minimise adverse impacts on both banks and borrowers. This requires more effective classification of household debtor groups, distinguishing which debts are used for business investments, generating income, and creating employment opportunities, and which are non-productive debts that result in unnecessary expenditure without benefiting the economy.
If the burden of unnecessary household debts continues to increase, it could ultimately impact both borrowers and the country. The issue needs to be addressed promptly and comprehensively.
