Two key committees under the Bank of Thailand have voiced concerns that threats to financial stability are still on the rise as household debt accumulation accelerates.
The country's family debt load remains high and is set to pick up further, particularly in auto loans, according to a summary of the joint meeting of the Monetary Policy Committee and the Financial Institutions Policy Committee.
Competition within commercial banking and non-bank financial institutions in retail lending business has intensified, resulting in lax underwriting standards and loans being offered in a manner that tempts people to run up more debt than necessary, said the committees.
"The meeting agrees that commercial banks and non-bank firms should be more concerned about borrowers' debt-servicing ability when they extend loans, especially to vulnerable groups such as low-income earners, first-jobbers and retirees," they said. "These groups are prone to accumulating excessive debt and their remaining disposable income might not be sufficient for living."
In an effort to prevent households from running up too much debt, the central bank has joined forces with commercial banks to set a standard for debt-service ratio.
"The meeting agrees that household debt is a risk to the financial system. Without imminent supervision, this high debt could snowball into a future crisis," the committees said.
The two committees are urging state agencies to implement the Cooperatives Act's organic laws, especially the laws pertaining to governing loan extension, liquidity and household debt accumulation and agreed that search-for-yield behaviour, which leads to underpricing of risk, still warrants monitoring.
Mortgage lending has decelerated after the loan-to-value (LTV) measures effective since April 1, reflecting the slowdown in speculative activities in residential market, the committees said.
New housing loan accounts fell by 4.6% year-on-year between April and May, with the second and subsequent mortgage contracts plummeting 36% first mortgage contracts inching up 0.2%.
The number of new housing loan accounts for the high-rise residential segment slid 45.3%, while low-rise ones dropped 21.9%, based on the second and the subsequent mortgage contracts made during the two months through May.
The number of new mortgage accounts for the first five months of the year surged 14.8% from a year earlier.
Given that risks from unsold residential property persist, both committees agreed to continue monitoring the LTV measure's impact, the property sector's adjustment and the unsold supply situation.
According to LTV regulations, the central bank requires a minimum down payment of 30% for third and subsequent mortgages, with those for second mortgages at 10-20%, depending on how long a borrower has made payments on the first one. The rules are intended to curb risky borrowing and property speculation.
Bankers said the tougher LTV measures struck a bigger blow to mortgage lending growth than expected in the second quarter.
The Bank of Thailand's housing loan curbs affect both unqualified and qualified homebuyers, as they have delayed home purchases and mortgage applications accordingly, said Nathapol Luepromchai, executive vice-president and head of the mortgage division.
He said homebuyers whose qualifications meet the central bank's mortgage regulations have slowed their buying decisions because they are counting on property developers launching promotional campaigns and incentives for property purchases following new government economic stimulus measures.