Household debt has become an alarming issue for the country, and as Thailand heads towards a general election this year, it’s a ticking bomb that needs the urgent attention of political parties making policy pledges to voters. 

Household debt had risen to 14.9 trillion baht in the third quarter of last year, equivalent to 87 percent of gross domestic product (GDP). “As an international benchmark, the Bank for International Settlements (BIS) warns a household debt-to-GDP ratio at 80 percent is a cause for alarm,” said Suwannee Jatsadasak, assistant governor of the Bank of Thailand (BOT).

Sharp increase

Thailand’s household debt has seen a sharp increase over the past 10 years from 59.3 percent of GDP in 2010 to 86.9 percent in the third quarter of last year.

Two-thirds of the debt is related to consumption and only a third is housing loan, a pattern opposite that of advanced economies such as Japan and Hong Kong, she said.

The slower economic growth and the fallout of COVID-19 are seen as possible reasons for the persisting high household debt.

Opposition parties have long blamed the low economic growth since General Prayut Chan-o-cha took the reins of power after the 2014 military coup.

Pheu Thai’s bold plans

In the run-up to the general election, the main opposition Pheu Thai Party is campaigning to implement economic policies that will boost the economic growth rate to 5 percent annually — if it comes to power. The party is promising policies that support low-income groups in order to narrow the gap between the rich and the poor.

The party has also pledged to increase the daily minimum wage to 600 baht and a starting salary of 25,000 baht a month for office workers holding a bachelor’s degree.

To address the woes of low-income farmers, the party is promising to deploy artificial intelligence (AI) technology to boost farm productivity. For farm marketing, the party says it will apply non-fungible tokens (NFTs), a type of digital assets, to promote Thai farm products. The party policy will focus on increasing the income of young adults and farmers.

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Alarming household debt facts

A study by the BOT found eight key facts related to Thailand’s household debt, according to Suwannee.

Debtors start to borrow money when they are quite young. The study found that 58 percent of the working population aged between 25 to 29 years start to accumulate high debt. Of the total, 25 percent of them turn into non-performing loans. Their debts include credit card, personal loan, hire-purchase of car and motorcycles. Some of them use their vehicles to earn a living, while in the case of the others it adds to rising bad debt. The more worrying sign is the debt of people aged below 25, including students in high school and colleges, who borrow money has also been increasing, the study said.

Debtors borrow amounts beyond their ability to repay and from multiple lenders. It is estimated that 30 percent of the credit card loans and personal loans, have on average four creditors. The debt is as much as 10-25 times the monthly individual income on average. It is much higher than the international benchmark practice of a debt limit at 5-12 times of monthly income.

In Thailand, the monthly debt payment accounts for more than half of the borrower’s monthly income and their credit card and personal loans account for more than 50 percent of the individual’s total debt, according to the report.

Credit card and personal loans are at the heart of the debt problem as they carry high interest rates. These loans do not have collateral and mostly they are short-term debt, resulting in a high amount of instalment payment each month.

The high rate of interest makes many of the people unable to repay their debt, and about 60 percent of these accounts default on their debt obligations.

The loan trap

Debtors do not have sufficient information or accurate information about loans. The blame rests with financial institutions who fail to explain clearly the loan conditions, such as fees, loan default fees etc. Some debtors are lured to borrow at a low interest rate but get a long-term loan, trapping them in a debt cycle.

The compulsion to acquire the necessities of life forces many to borrow money, as 62 percent of Thai families do not have adequate savings for emergency spending. If their own income drops by 20 percent, more than half of Thai households would not be able to repay debts so they have to borrow from financial institutions or loan sharks to make ends meet. The majority of them cannot service debt due to their dependence on uncertain income streams. Such groups include farmers, freelancers, the self-employed, street vendors, those who do odd jobs, those providing services and factory workers, the study said.

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Caught in a debt cycle

Many of debtors are trapped in a debt cycle for a long period of time. About a quarter of people aged over 60 years still have debts to repay, averaging 415,000 baht per person, according to the BOT study. Most of them are farmers and those who have credit card loans. Others who borrowed personal loans at a low rate have a longer period of repayment, such as at 3 percent interest and seven years for repayment.

Bad debts largely are related to personal loans and loans to farmers. Around 10 million loan accounts have turned into bad debt. Of the total, 4.5 million accounts defaulted during the pandemic, or 3.1 million people, with a combined debt of 400 billion baht.

Defaulting accounts in state-owned Specialized Financial Institutions (SFIs) represent 70 percent, non-banks at 20 percent and commercial banks 10 percent. The majority of bad debts are related to personal loans and loans to farmers.

Dependence on loan sharks

There is no visible end to the debt cycle, and about a third of the debtors, who were sued by creditors, still have outstanding debt after foreclosure. Cash generated from forced sale of their assets cannot cover the debt amount.  One of the issues is that debtors cannot access debt restructuring with creditors before and after a lawsuit and a court’s verdict. Retail debtors who do not run any business, cannot ask for protection under bankruptcy law. This prohibits them from accessing the rehabilitation process, resulting in trapped indebtedness forever. The bankruptcy law may need to be changed to accommodate those individuals, according to the central bank.

The issue of debt owed to underground lenders continues to pose challenges for the system. About 42 percent of 4,600 families, who asked for help under a debt resolution scheme initiated by the central bank and the Finance Ministry, owed debt of 54,300 baht on average to underground lenders.

Why loan sharks are preferred

There are three reasons behind why they have to borrow from sources other than banks, non-banks or SFIs: They cannot access the financial system because of their uncertain income stream; financial institutions do not have information about their income record so they do not lend, or they might give loan but at high-interest rates; borrowing from loan sharks is convenient despite high rates, as they do not require loan collateral. Some debtors borrow from underground lenders to repay their debt to financial institutions.

What’s next?

The BOT plans to issue additional regulations demanding responsible financial lending. The BOT has also suggested a change to the bankruptcy law. The amendment, however, must be approved by Parliament.

The central bank’s study poses a challenge for political parties to find ways on tackling the grim household debt situation.

By Thai PBS World’s Business Desk