The Bank of Thailand (BOT) and the Finance Ministry have introduced a series of debt-relief measures in recent years to tackle the household and small business debt crisis.
Lately, the Cabinet has approved comprehensive debt-relief measures, which include exemption of interest payment and reduction of installment loans for three years. But will these measures be effective in alleviating the debt burden?
Key components of the debt-relief measures
One of the cornerstone measures approved by the Cabinet is the reduction by a half in the annual contribution of banks to the Financial Institutions Development Fund (FIDF).
For the next three years, banks will contribute 0.23% of their deposits, down from 0.46%. This reduction is designed to free up capital that banks can then use to support debt-relief initiatives for their customers.
But the central bank will review every year to determine whether to continue or discontinue the FIDF fee reduction.
The debt-relief measure aims to address this by offering support to an estimated 2.1 million accounts of 1.9 million debtors with a combined total of 890 billion baht in loans.
These loans, taken to purchase houses, automobiles, and finance small and medium-sized businesses from commercial banks, non-bank lenders—part of commercial bank businesses— and state-owned financial institutions.
Specific Reliefs
Debtors will be eligible for interest exemption for three years and they will be offered a reduction in the installment payments of the principal amount of their loans.
They will be allowed to pay 50 per cent, 70 per cent and 90 per cent of their current installments in the first, second and third year respectively. If they could pay higher minimum installments, their debt accounts will be closed sooner.
Eligibility criteria
The relief measures cover:
● Housing loans of up to 5 million baht
● Car loans not exceeding 800,000 baht
● Motorcycle loans not exceeding 50,000 baht
● Small business loans of up to 5 million baht
● Personal loans and credit card debts attached with housing loans
Those loans must have been advanced before January 1, 2024. The measures are targeted at borrowers with debts overdue for up to one year as of October 31, 2024.
Loans that were defaulted previously and were restructured between January 2022 and October 2024 are also eligible.
Sources of funding for debt-relief
The FIDF’s fee reduction is expected to save about 39 billion baht annually for commercial banks and they would reallocate that amount and also top it up to support debt restructuring, while costs incurred by state-owned banks would be covered by the state fund.
To support this, the government will provide non-bank lenders with 50 billion baht in cheap loans at interest rates of 2 per cent.
Meanwhile, there is also a debt solution for small borrowers with outstanding debt not exceeding 5,000 baht on each account.
They will be offered the option of paying a small amount equal to10 per cent or 50 per cent of what is due to close their loans, depending on the agreement between lenders and debtors.
It covers individual borrowers who had debt overdue for more than 90 days as of October 31, 2024.
Economists not impressed
The latest debt-relief measures appear to be comprehensive and could help ease the burden of debtors. However, some economists are cautious about its effectiveness.
“Those measures address the symptoms not the root causes,” said Pipat Luengnaruemitchai, managing director and chief economist at Kiatnakin Phatra Financial Group. “The root cause is that people don’t have adequate income.”
He wonders whether debtors who have defaulted on their debts could repay discounted debt. The slower growth of the economy is not conducive to higher wage growth or rising income of the people.
He, however, said that the debt relief package may be beneficial to some group of debtors who could pay back restructured debt.
“It is a kind of short-term pain for longer term gain as those who resume their debt payment could later regain access to new loans if their past poor financial record at the National Credit Bureau improves,” he added.
They warned about the moral hazard issue. Many borrowers who pay their debts on time have taken to social media to express their concern over the debt payment culture and complained about why they were not getting any privileges for their good faith.
Pipat said that if debtors do not expect more support coming from the government, it might not be a big issue of moral hazard.
Assoc Prof Sunti Tirapat at the National Institute of Development Administration (NIDA) shared Pipat’s view, saying that the success of the debt restructuring would largely depend on how the overall economy performs, and the outlook is not bright.
Eventually, taxpayers would have to shoulder the cost incurred by non-bank lenders and state-owned banks, said Santi.
Root causes of household debt
Household debt has been a chronic problem and the fallout from COVID-19 has only worsened it.
Households whose incomes were lower than 30,000 baht a month were hit hard during the pandemic, according to a consumer survey by SCB EIC in 2023.
Consumer behavior also plays a significant role in the accumulation of debt.
The allure of consumer goods, combined with the availability of easy credit previously, led many Thais to spend beyond their means.
This behavior, especially among the young generation, is exacerbated by inadequate financial literacy, which limits individuals' understanding of the long-term consequences of debt.
Previously, the BOT's policy of setting a low interest rate also encouraged consumers to borrow more while the young generation quickly accumulated debts higher than their income.
Most of them could not service student loans, due partly to the unfavorable job market.
Many bought new cars with debt. Their value dropped sharply as Chinese electric car markers cut the prices of their new cars frequently. In turn it hurt lenders due to the low price of cars that were repossessed.
Mortgage loans were also turned into bad debt. Thai banks' non-performing loans (NPLs) in the third quarter of the year rose to the highest level in three years, reaching 2.97 per cent of outstanding loans.
Given such conditions, banks and non-bank lenders have denied large numbers of new loan applications, resulting in subdued economic activities.
Positive signs?
Thailand’s household debt, which totals 16.3 trillion baht, accounting for 89.6% of GDP in the second quarter, dipped slightly below 90 per cent of GDP for the first time in three years.
But observers believe it is a technical issue of GDP expansion rather than a substantial increase in household income.
There were some signs of economic recovery, as exports grew in the later months of the year.
“But the country has run trade deficits and export expansion may be temporary as importers are worried about high tariff rates when President-elect Donald Trump takes office in January,” said Pipat.
Looking at the longer term, the job market may be under high pressure as artificial intelligence could replace many workers.
“The impact of AI on the job market may have been underestimated currently,” Santi warned and said that many jobs would be lost.
