6 June 2024

At the first meeting of the Cabinet on September 13, the new government announced a debt moratorium policy for farmers and small businesses. It was a common refrain of many political parties during the campaign for the May 14 general election as they went all-out to woo voters.

Critics have long suspected political expediency rather than any serious attempt to solve the economic issue as the motivation for the debt suspension pledges.

Over the past nine years, the two former governments headed by Gen Prayut Chan-o-cha had implemented debt suspension for farmers.

The outcome has been far from good, according to Sommarat Chantarat, research director, and Lathaporn Ratanavararak, principal researcher, at Puey Ungphakorn Institute for Economics Research, who have studied the previous debt suspension schemes.

By analyzing the data base of the National Credit Bureau, the two researchers found that 90 per cent of farmers have accumulated high debt, each of them owing more than 450,000 baht on average. Their debt had multiplied by about 75 per cent in the past nine years, said Lathaporn.

The most important point is that more than half of them have persistent debt, suggesting they might not be able to free themselves from the debt cycle. The majority of them may be able to pay only the interest amount, while the principal remains.

A study of 1 million debtors of the state-owned Bank for Agriculture and Agricultural Cooperatives (BAAC), from 2014-23, showed 13 debt suspension measures were launched by the government with the participation of a large number of farmers. Around 42 per cent of participants remained in the debt programs for more than four years.

The previous governments had implemented, both a debt moratorium for a wider group such as under the Pracharath Agriculture scheme, as well as a targeted group impacted by natural disaster. These programs allowed farmers to delay repayment of the principal amount but they had to pay the interest on their loans. The debt suspension covered both those who had difficulty in servicing their debt and those who could repay their debt.

Flaws in previous schemes

Researchers found flaws, as there were no conditions to encourage financial discipline. The two researchers reached a conclusion that the previous debt suspension policies had failed to help debtors solve their debt sustainably.

“Farmers who participated in debt suspension had accumulated considerably higher debt than those who chose not to join the debt programs,” said Sommarat.

There are reasons for that, as 77 per cent of participants were granted new loans and 50 per cent of them could not service the interest payment.

Farmers participating in a debt moratorium have a tendency to degrade into bad debtors, probably due to a reduction in their financial discipline or being discouraged by the rising debt amount. Debtors have a tendency to re-enter debt suspension again, reflecting a moral hazard, according to the researchers.

Making debtors addicted

When they looked into the implications of debt suspension on groups of farmers, they found interesting evidence.

The first group was those who had the potential to borrow and repay loans, but had a greater tendency to default on debt payments than other groups. The outcome suggests moral hazard, so debt suspension creates more problems for them.

The second group was those who had the potential but they sometimes faced difficulty in repaying their debt. The debt moratorium improved their financial liquidity in the short-run. But it did not help them service their debt, and they ended up re-entering debt suspension programs. So this kind of program does not help them tackle their debt in the long-run.

The third group was those who had low potential and were unable to service their debt. These people, especially the elderly, had accumulated more debt and were prone to defaulting on their loan repayments. Debt suspension did not lead to significantly higher savings and investment, but it was more likely to help them postpone debt repayment, but not really enable them to service their debt eventually.

Suggestions for debt suspension

To correct the flaws of previous debt suspension schemes, the two researchers offered some suggestions:

First, it should be a short-term measure and introduced to handle crises, such as the impact from a natural disaster and pandemic like COVID-19. The debt measure should be designed to target debtors who have the potential to repay loans but were facing temporary financial difficulty.

Second, there should be a mechanism to encourage financial discipline. For example, those who could still continue repaying should be given incentives to continue to service their debt, such as a rate cut for new loans.

In the cases of those who were unable to service their debt, partial repayment should be encouraged, and they should be given support to remodel their businesses that could potentially increase their incomes.

Third, debt suspension should not be the main tool to support farmers. The government needs to implement measures that will reduce their dependence on debt suspension and prevent moral hazard. Policymakers may choose to introduce insurance contracts against loan loss, said Sommarat.

The government should focus on those who have persistent debt — they account for 50 per cent of farmer debtors. Policymakers should develop financial infrastructure such as a database of farmers that would help banks to lend efficiently and support debtors in the right way, she added.

Guidelines for debt suspension

Responding to criticism, Deputy Finance Minister Julapun Amornvivat  said that the ministry wanted to seek the opinion of concerned agencies about the new round of debt suspension. The package for a three-year debt suspension would be submitted to the Cabinet for approval on September 26.

He said that he had met on September 22 with executives of the BAAC, including the bank’s president, Chartchai Sirilai, to discuss the new plan. He assured them that the policy was not a blanket coverage of all debt as in the past nine years.

Under the new package, farmers will have to visit the BAAC’s branches to personally apply for the debt suspension. They could choose to delay debt payment, both the principal amount and the interest. The scheme was aimed at helping farmers recover from their indebtedness by helping them to earn more income, Julapun said, while the government would compensate the BAAC for the financial cost it would be incurring.

The scheme is expected to support smart farmers, promote new techniques to increase farm productivity and encourage farmers to do large-land plot farming.

Meanwhile, Chatchai assured that the new debt moratorium program would try to get rid of the previous pain points as much as possible. The new package is also designed to prevent a moral hazard.

Currently the BAAC has 3.9 million debtors with combined outstanding loans of 1.4 trillion baht. Those who want to participate must visit the BAAC’s branches to authenticate themselves on the BAAC mobile application. In this way, the bank would be able to closely monitor the debtors, he said.

New loans would be granted to prevent debtors borrowing money from loan sharks, he added.  Taxpayers, meanwhile, would watch if the new round of debt moratorium repeats past blunders.

By Thai PBS World’s Business Desk