Thai banking sector to weather government's debt relief programme

The Thai government's latest debt-relief proposals are expected to have minimal impact on banking-sector credit metrics in 2025, according to a statement released this week by Fitch Ratings. 

The limited scope of the initiative, while aimed at addressing household-debt concerns, is unlikely to influence bank lending patterns significantly or boost economic growth.

The programme, which could potentially assist borrowers with collective debts of up to 890 billion baht, faces practical limitations in its effectiveness. 

Most eligible borrowers are believed to have debts already categorised as Stage 2 or Stage 3 loans, for which banks have typically made provisions or written off. 

The proposed restructuring measures, including reduced instalments and interest-payment waivers, largely mirror standard practices banks already employ for struggling clients.

To offset the costs incurred by participating banks, the government plans to reallocate half of their contributions to the Financial Institutions Development Fund (FIDF) over a projected three-year period. 

Currently, banks contribute 0.46% of their deposit value annually to the FIDF, with most funds allocated to settling debts from the 1997 financial crisis.

Questions remain regarding the accounting treatment of government compensation payments and whether FIDF funds will sufficiently cover banks' implementation costs. Should FIDF funding prove inadequate, the government might need to redirect resources from other programmes.

Interestingly, some banks could potentially emerge as net beneficiaries if they receive subsidies for previously provisioned loans.

Compared with the extensive borrower-relief measures implemented during the Covid-19 pandemic, this scheme's modest scope may have limited effectiveness in addressing Thailand's substantial household debt, which stood at 90% of GDP as of June. The continuation of regulatory controls, including retail interest-rate caps, suggests a measured approach to debt management.

Thailand's unique position as one of few Asia Pacific markets extending regulatory relief measures during the post-pandemic recovery period highlights the persistent challenges within its banking sector. 

Fitch Ratings projects modest 2% growth in bank-system loans for 2025, driven partly by a gradual reduction in interest rates. While this represents an improvement from the expected 0.1% increase in 2024, it remains significantly below the forecast nominal GDP growth of 4.6%, suggesting a continued trend of declining system leverage.