Banks mull novel debt ratio rule

Banks mull novel debt ratio rule

BoT mandates uniform standard

Personal loan product offers at a money expo. Commercial banks are expected to agree to a uniform standard on debt service ratio. (Photo by Somchai Poomlard)
Personal loan product offers at a money expo. Commercial banks are expected to agree to a uniform standard on debt service ratio. (Photo by Somchai Poomlard)

Commercial banks are expected to finalise a single standard for debt service ratio (DSR) in the first half of this year, as required by the Bank of Thailand, as a tool for controlling risk and reducing the household debt that is at a stubbornly high level.

Banks have been discussing the issue since the central bank requested all banks apply the same DSR standard, said Predee Daochai, chairman of the Thai Bankers' Association.

Each lender uses different calculation methods and figures for DSR, which is an indicator to determine a borrower's ability to repay debt, but the methods are quite similar.

"Each borrower's DSR typically should not exceed 40%, but banks may offer loans to some clients with a DSR above the threshold by giving higher weight to certain figures in their risk profile," Mr Predee said. "The risk appetite of each lender also plays a role."

Central bank governor Veerathai Santiprabhob recently told Bangkok Post Group in an exclusive interview that ebbing debt servicing ability among borrowers, particularly low-income earners, is an area of concern because the slow deleveraging of household debt remains a drag on the country's economy.

Income could be hurt and debt-servicing ability could deteriorate if any unexpected shocks crop up, Mr Veerathai said.

The Monetary Policy Committee minutes for the Nov 14 meeting also highlighted the issue, saying that the share of new mortgage loans with high loan-to-income ratios continues to rise, while the DSR of low-income households remains elevated. The debt servicing ability of small and medium-sized enterprises with rising bad loans must still be monitored, particularly businesses affected by structural changes such as rice mills and wholesale and retail businesses.

Even though the country's household debt has declined from a record high of 80.8% of GDP in 2015, the pace of deleveraging was slow, dipping only to 77.8% last June.

Mr Predee said the intensifying competition in some loans and banks' focus on high-yield financial products could create higher risk but won't necessarily lead to higher non-performing loans, which largely depend on risk management at each financial institution.

He acknowledged that banks in general are focused on retail loans, including unsecured finance and digital lending, this year, on the expectation that these high-yield products will contribute better revenue to offset the decline in fee-based income after digital transaction fees were waived last year.

The online channel transaction fee waiver has put a hole in banks' revenues, particularly for the country's four largest banks: Bangkok Bank (BBL), Siam Commercial Bank (SCB), Krungthai Bank (KTB) and Kasikornbank (KBank). For instance, the four banks posted lower non-interest income on both quarter-to-quarter and year-on-year bases for the three months to December.

SCB's non-interest income for the final quarter last year fell 13.1% quarter-to-quarter and 15.8% year-on-year to 8.98 billion baht, while KBank's declined 3.87% quarter-to-quarter and 15.1% year-on-year to 12.5 billion.

BBL's non-interest income for the fourth quarter 2018 was 10.65 billion baht, declines of 5.9% and 9.7% quarter-to-quarter and year-on-year, respectively. KTB booked income of 7.6 billion baht, down 5.1% year-on-year but up 8.2% quarter-to-quarter. KBank, the country's second-largest lender by assets and the biggest mobile banking service provider by users, took aim at growing digital lending by 10 times to 10 billion baht this year from 1 billion last year.

SCB is another bank that is gearing towards digital lending this year, targeting credit cost of 115-135 basis points this year, compared with 115 in 2018, to build its loan-loss buffer to prepare for digital lending expansion. The bank has also widened the ceiling rate on commercial loans to small business operators and self-employed clients to 28% from the previous 19.4-22.4% in a move to prepare for expanding to digital lending.

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