Proposal to erase borrowers’ repayment records is fraught with danger
As the general election approaches, rival political parties have unveiled their policy pledges designed to lure voters. Parties usually make promises that could make an immediate impact, without taking into account the long-term ramifications.
One of the controversial proposals is by the Chart Pattana Kla Party, which has promised to erase the debt repayment records of borrowers. The party claims that such a record becomes a blacklist for those who failed to repay their debt in the past, and prevents them from getting new loans from banks or non-bank institutions. Deleting the past record would give them access to bank loans, according to the party’s narrative.
Korn Chatikavanij, leader of the party, has proposed a credit score system to replace the current credit information system. A credit score system will take into account loan applicants’ income and daily spending, he explains.
Korn, a former finance minister, said new loan criteria was needed because millions of Thais had been blacklisted by the national credit bureau for being unable to make debt repayments amid the pandemic fallout and the high cost of living.
Korn explained that the credit score system he is proposing would measure repayment ability and was partly derived from debt-payment records. It also includes data on paying other bills, such as mobile phone, internet, water and electricity bills.
Evolution of credit reporting
The National Credit Bureau Co (NCB) has evolved over a long time. In the initial stages, it was a little-known small unit under the Bank of Thailand (BOT) that collected credit information. But when the Asian financial crisis hit Thailand in 1997, the Finance Ministry gave serious thought to creating a full-fledged credit reporting system.
The ministry created a credit company, while the BOT and commercial banks created a separate credit reporting company. The two entities were merged into the NCB in 2005, and since then it has played a key role in providing credit information to banks and facilitating those having a good debt payment to get access to loans. It has developed a consumer credit reporting system and a commercial credit reporting system.
It helps banks manage risks, as they can gauge the likelihood of a loan default from the history of the borrower, also informing them about the ability of borrowers to repay debts. For borrowers, an honest financial record gives them more or less a better chance to obtain loans from banks.
Worry of financial stability
Tharith Panpiemras, assistant governor of the BOT, has expressed his opposition to Chart Pattana Kla Party’s campaign promise to clear the credit records of defaulting debtors and scrap the blacklisting measure in the Credit Bureau system.
Tharith said that credit information of debtors was a history book that reflected the behavior of debtors. Offering to cancel the blacklisting of debtors was similar to wiping out credit history, which could threaten the stability of the banking system in the future.
Surapon Opassathien, managing director of the NCB, echoes Tharith’s view, warning that such a policy could greatly damage the financial system and even create a financial crisis similar to the one in 1997. Non-performing loans stood at 1.09 trillion baht with 5 million to 5.5 million debtors unable to service their debts and hence unable to get new loans, said Surapon, referring to the NCB’s database in the third quarter of 2022.
A dangerous proposal
Lack of information about borrowers could make it harder for banks to lend, or set lending rates according to the level of risk of each borrower.
“Debtors who suffered from the pandemic fallout might not be able to repay previous debts, but if they currently have sustained income, they could show the new information to banks while applying for new loans,” Chayawadee Chai-anant, another BOT assistant governor, said. This would be a more appropriate solution than cancelling the credit history report, she said.
She believes that banks not only take into account the past debt payment record, but they also look at the current situation when debtors may have a new stream of income. She suggested that debtors make their income and credit information available digitally.
Debt restructuring could help
Debt restructuring could provide debtors some leeway to extend the loan repayment period. The central bank and the Finance Ministry have encouraged state-owned and commercial banks and their debtors to engage in debt restructuring since the outbreak of COVID-19. The scheme is aimed at supporting small and medium-sized enterprises and individual consumers.
“Debtors should turn to their creditors in order to arrange new debt payment,” Chayawadee suggested. Surapon, meanwhile, urged the BOT to take a more active role in debt restructuring, not just encouraging banks and debtors to engage in discussions.
Debt restructuring in effect is a time-buying strategy, while waiting for economic or business recovery. Thailand has been hit hard by the pandemic, particularly small businesses and individuals who lost their jobs or whose incomes declined.
The economy is currently seeing a fragile recovery. Some economists describe it as a K-shaped recovery, where some businesses recover faster while others are still under water.
Hotels, restaurants, transport, tour agencies and tour guides are expected to benefit from the recovery of the tourism industry as many countries have fully reopened their borders, and lately even China is allowing its citizens to travel abroad. Some economists have predicted a doubling in tourist arrivals this year compared to last year.
Rate hike and debt restructuring
The continuous increase in interest rates could adversely affect the debt restructuring efforts of the BOT, as it has to catch up with the US Federal Reserve, which has raised its policy rate eight times since March last year, pushing its benchmark Fed fund rate up to 4.5 to 4.75 percent this month, the highest since 2007.
The BOT increased Thailand’s policy rate to 1.50% last month, while commercial banks and state-owned banks also have started to increase lending rates. From the central bank’s perspective, rate hikes in Thailand are still modest and accommodate economic recovery.
The country’s shadow banking system continues to play an active role, while there have been concerns about the brutal debt collection methods of loan sharks. There are some places where lending could be among friends, relatives or family members.
“If debtors are unable to borrow from financial institutions, they might turn to underground loans, such as borrowing from friends and family members, but they should keep such borrowings to as minimum as possible,” Chayawadee suggested.
Some debtors have taken their financial plight to social media platforms and been successful in getting funding support from citizens. Some have managed to raise so much money that it has sparked a public outcry.
The merit of crowdfunding is that a large number of donors can make small contributions of under 100 baht, which will not be a huge load on them individually. When a large number of people make small contributions, they can help a desperate debtor raise the required amount of money to repay a loan.
Debt forgiveness might be the last resort to help a large number of people weighed down by loans. It would be a controversial move as the government would need to foot the bill at the cost of the taxpayers. It could also stir a hornet’s nest, prompting other groups of borrowers to also seek debt forgiveness, or become less inclined to repay their debts on time.
“Should debt forgiveness be implemented, it must be done very carefully; it must be done in a targeted way to avoid moral hazard,” said Chayawadee.
The current government had designated 2022 as the year to solve the household debt problem, but progress has been slow in tackling this huge challenge. The issue will not go away and will need attention this year as well.
A new government after the general election may come up with alternative solutions, but political campaigns of the kind launched by Chart Pattana Kla Party are of concern to observers from the viewpoints of financial stability and moral hazard.
By Thai PBS World’s Business Desk