The thorny roots of debt

Overwhelming debt has been the key issue during economic discussions the past several months, as it contributes to declining car sales and weak demand for property, particularly in the low-income segment.
The high rejection rates for mortgages and car loans is a persistent obstacle for these two sectors, as banks are reluctant to risk their financial stability for fear of non-performing loans (NPLs), prompting the government to seek solutions that address the root cause.
MEASURES PREPARED
Pornchai Thiraveja, director-general of the Fiscal Policy Office (FPO), said the Finance Ministry, in collaboration with the Bank of Thailand, the National Economic and Social Development Council and the Thai Bankers’ Association (TBA), is preparing measures focused on alleviating debt repayment burdens for individual borrowers and small and medium-sized enterprises (SMEs) affected by the slow economic recovery, especially those with lower incomes and high debt.
These measures cover loans with lower limits, such as mortgages, car loans and small business loans. The measures will use a debt restructuring approach to reduce the repayment burden for borrowers during the programme, he said.
Borrowers repay only the principal, with interest payments temporarily suspended. If borrowers meet the specified conditions, the suspended interest is waived as an incentive for them to maintain repayment discipline both during and after the scheme.
While participating in the programme, borrowers will not be allowed to borrow more for a certain period to ensure the goal of reducing their debt burden is achieved, preventing participants from intentionally defaulting on payments to take advantage of this measure, said Mr Pornchai.
The initiative would be temporary, supporting small borrowers who intend to reduce their debt and are expected to resume normal repayments once their incomes recover, he said.
The programme will address structural issues by linking government data and bank data to enable all parties to effectively assess debt burdens and repayment capacities, said Mr Pornchai.
He said the details and eligibility criteria for this measure are still under consideration, though it is expected to cover borrowers with loan agreements made before Jan 1, 2024, and those experiencing repayment difficulties according to specified criteria, based on data as of Oct 31, 2024.
The TBA, Finance Ministry and central bank are working on the eligibility criteria, participation requirements and specific details, said Mr Pornchai.
“We need to implement measures to help restructure household debt, preventing it from affecting economic growth in the future,” he said, adding the Bank for International Settlements revealed if household debt exceeds 80% of GDP, the debt burden can have a negative effect on long-term economic growth.
Measures to address household debt are essential, with the Finance Ministry previously introducing various initiatives to assist small debtors, such as reducing or maintaining loan interest rates at state financial institutions and offering debt suspensions for customers at the Bank for Agriculture and Agricultural Cooperatives.
The FPO believes household debt levels should be less than 80% of GDP to reduce risks to financial stability and long-term economic growth, said Mr Pornchai. Efforts should focus on reducing non-productive debt across the agricultural, business and household sectors, he said.
In the second quarter this year, the household debt level was 89.6% of GDP, down from 90.7% in the first quarter.
Mr Pornchai said although the household debt level is high, the majority of this debt, roughly 66.5%, is from asset purchases aimed at wealth accumulation, as well as debt related to career development and education. Some 44.7% of all household debt is secured by collateral.
He said household debt levels are likely to decrease in the future as auto and motorcycle loans contract, after a decline of 5.77% in the second quarter, marking the third consecutive quarterly dip.
Real estate lending is also slowing, growing only 3% in the second quarter compared with 3.48% in the first quarter, marking the seventh consecutive quarterly decline, said Mr Pornchai.
HELP IS ON THE WAY
Thitima Chucherd, head of economic and financial market research at SCB EIC, a research centre under Siam Commercial Bank, said the interest payment suspension, allowing targeted borrowers to pay only the principal, would help vulnerable borrowers reduce their outstanding debt more effectively.
“By suspending interest payments, the scheme is likely to encourage vulnerable borrowers to participate. This should give debtors some breathing room,” Ms Thitima said.
She said the temporary prohibition on accepting new debt should help foster greater debt discipline among participants.
Thakorn Piyapan, president of TMBThanachart Bank, said the new scheme targets vulnerable borrowers with mortgage, auto and small business loans.
He said all relevant parties, including both the private and public sectors, will engage in detailed discussions to finalise the debt restructuring programme, which is expected to start at the beginning of next year.
Mr Thakorn said the new programme should help reduce the number of repossessed vehicles and cars entering auction yards, allowing vulnerable auto loan borrowers to continue using their vehicles for work, under the terms of the programme.
He said he expects the automotive industry and car lending to recover next year, driven by an economic rebound based on the government’s stimulus measures as well as lower interest rates supporting consumer purchasing power.
NUDGING BANKS
New measures to deal with the debt burden of individuals and SMEs are necessary but insufficient, as the government must also address banks’ concerns over high household debt levels, said Suphan Mongkolsuthree, former chairman of the Federation of Thai Industries (FTI).
“I believe banks are still gripped with fear of NPLs. Authorities must come up with new solutions for both lenders and borrowers,” he said.
He suggested the Finance Ministry and central bank consider how to ensure banks can smoothly run their businesses while also helping households and entrepreneurs cope with financial problems.
The high level of household debt has prompted banks to become more selective about granting loans, hampering the manufacturing sector, especially the auto industry.
Sluggish domestic car sales this year are attributed to banks’ stricter loan criteria, said Mr Suphan.
Lower car sales led the FTI’s Automotive Industry Club to reduce its total car production target for 2024 again, dropping it to less than 1.7 million units.
In July, the club cut the target from 1.9 million units, attributed to ballooning household debt and a low level of household income amid a stagnant economy.
Surapong Paisitpatanapong, vice-chairman of the FTI and spokesman for the club, said earlier the value of auto loans is declining, but NPLs in the automotive industry show no signs of abating.
This caused banks and financial service providers to remain cautious about granting auto loans, with the rejection rate ranging from 50% to 60% of loan requests, he said.
These rates clearly show banks are worried about bad debt, said Mr Surapong.
Mr Suphan said he is in favour of the TBA’s proposed interest payment suspension for vulnerable borrowers with mortgages, auto loans and small business loans.
“The three-year interest payment suspension is an appropriate period for SMEs to quickly recover from financial problems,” he said.
BURDEN RELIEVED
Issara Boonyoung, chairman of the committee for real estate development at the Thai Chamber of Commerce, said the government’s debt relief measures should ease borrowers’ financial pressure.
“Temporary interest payment suspension for car loan borrowers can help prevent repossession, allowing them to continue using their vehicles for work,” he said.
Similarly, homebuyers can keep their residences, as losing their homes would force them to seek rental housing, increasing their financial burden, said Mr Issara, also honorary president of the Housing Business Association.
While these measures may not directly or immediately increase new home purchasing power, they could have an indirect effect by preventing an economic downturn caused by an influx of debt repayment problems, he said.
A crucial factor for the housing market is reducing the number of non-performing assets. These assets, once added to the existing inventory, can compete with current supply, which increases the housing market supply, said Mr Issara.
“For SMEs, which are a major source of employment, the temporary interest payment suspension not only helps keep their businesses afloat, but also prevents job losses, enabling SME employees to still consider homeownership,” he said.
Interest rate cuts and the low rates offered by the Government Housing Bank can ease repayment burdens when incomes remain stagnant or decline, said Mr Issara.
“This measure should motivate commercial banks to collaborate with developers to introduce lower lending rates or offer more competitive financing terms for homebuyers,” he said.
Sanan Angubolkul, chairman of the Thai Chamber of Commerce, said the proposed debt relief measure applies only to debtors of commercial banks, but there are many debtors to non-bank institutions. He said these other financial institutions should be included in the debt restructuring programme.
“The interest payment suspension is a short-term measure to ease household debt. The real problem is people still lack income,” said Mr Sanan.
“Therefore, it is important for the government to stimulate the economy.”
LONG-TERM SOLUTION
According to Maybank Securities (Thailand), the Finance Ministry is discussing with the TBA a proposal to allow borrowers to pay 50% of monthly instalments, deferring interest for three years for debts that are overdue by 1-12 months.
The target groups are individuals with home loans of up to 3 million baht, car loans of up to 700,000 baht and SME loans of up to 3 million baht. The measure is expected to take effect on Jan 25.
“We are somewhat positive on the potential new debt relief measure as banks can release some provisions and earn interest back from the Financial Institutions Development Fund,” said Jesada Techahusdin, research analyst at Maybank Securities, adding banks normally book provisions to offset interest income from NPL borrowers.
This is also an opportunity for customers to communicate with the banks to discuss and resolve their NPLs, he said.
In terms of fundamentals, banks face several headwinds including a slowing economy and high consumer debt levels, said Mr Jesada.
Loan growth is expected to remain weak, as banks stay cautious about SME and retail loans, he said.
“Investors believe the new debt relief measure could slightly reduce sector NPLs, but prefer to see measures that increase household income first before increasing exposure,” said Mr Jesada.
“We believe this measure is the first step of a long-term solution to address the structural issue of high household debt in Thailand. But in order to reduce system NPLs and improve the economy, we expect more measures to increase household income.”