Commercial banks and state-owned financial institutions have reacted swiftly to the Bank of Thailand's recent monetary policy easing by cutting their lending rates, but the efficiency of such a move remains opaque amid lethargic economic conditions.
Viewed as a joint response to the central bank's monetary policy easing, Kasikornbank, Krungthai Bank and Bangkok Bank cut their minimum overdraft rate (MOR) and minimum retail rate (MRR) by 25 basis points, while Siam Commercial Bank lowered its MRR by 25 basis points but trimmed its MOR by a smaller amount of 12.5 basis points.
The lower interest rates of these four major banks took effect on Aug 15.
Soon afterward, GH Bank and Government Savings Bank jumped on the rate-cutting bandwagon, slashing their prime rates by 12.5-13 basis points, effective from Aug 16.
The seemingly collective effort is music to the ears of both consumers and small and medium-sized enterprises (SMEs), since the move helps to alleviate their debt burdens.
Still, there are doubts about whether lower interest rates are merely a symbolic move to bolster sentiment, as such a remedy may only be a temporary anaesthetic and a cosmetic attempt to revive the lacklustre economy.
SHEER PAINKILLERS
With a recession looming on the horizon in major advanced economies and China's economic slowdown in addition to the protracted Sino-US trade row, Thailand's economy is poised to experience higher uncertainty going forward.
Slowing exports and ebbing private investment will eventually take a toll on domestic private consumption, said independent academic Somjai Phagaphasvivat.
Lower interest rates will help ease the burden of SMEs and those paying off mortgage loans after the tightened loan-to-value (LTV) regulations came into effect, Mr Somjai said.
"Existing measures are only painkillers, not stimulus incentives," he said. "The actual factor incentivising private investment is infrastructure investment projects."
Despite calls for greater stimulus, financial and fiscal stability should be in the minds of policymakers because Thailand's household debt remains high, Mr Somjai said.
"A one-time reduction in the policy interest rate should not affect domestic financial stability that much," said Usanee Liurut, executive vice-president of Asia Plus Securities. "In reality, lower interest rates will not help much because the economy is not good and purchasing power is weak. Such a move only helps shore up [consumer] sentiment to a certain degree."
A sign advertises interest rates at a money expo. The lending rate cut helps alleviate the burden of existing borrowers. PATIPAT JANTHONG
DEBT IMPLICATIONS
Although lower interest rates are helpful for consumers and companies shouldering high debt burdens, the repercussion is how lower borrowing costs could make a country's financial stability susceptible to higher household debt accumulation and non-performing loans.
Nathapol Luepromchai, executive vice-president and head of the mortgage division at Bank of Ayudhya (BAY), said banks cutting the rates of MOR and MRR will not encourage consumers to pile up their borrowings and significantly fuel loan growth demand, given tepid economic growth and rising uncertainties.
On the contrary, the lending rate reduction helps alleviate the interest burden of existing borrowers, Mr Nathapol said.
"The rate cut will not encourage higher loan demand amid the sluggish economy because interest rates are a secondary factor," he said. "The main factors rather are consumer confidence and the government's stimulus package, which will help bolster sentiment."
Household debt, however, is a key concern dragging economic growth momentum, he said.
Thailand's household debt stood at 78.8% of GDP on a seasonally adjusted basis in the first quarter, at 12.97 trillion baht, up from 78.6% in last year's final quarter and 12.83 trillion baht.
The Bank of Thailand has tried to ward off financial stability risks and prevent household debt from further increasing by issuing retail lending guidance for vulnerable groups, defined as those earning a monthly income below 30,000 baht, with a focus on first-jobbers, millennials and the elderly.
Under the guidance, banks have been requested to avoid lending to vulnerable groups in case their debt-to-service ratio (DSR) exceeds 70% of monthly income.
Mr Nathapol of BAY said the government's planned formation of a fiscal and monetary committee will help build up consumer confidence, as collaboration among related economic policymakers will better support economic growth and offer remedies to economic problems.
The recent MOR cut will benefit business operators, covering both SMEs and large corporates, said Wirawat Panthawangkun, senior executive vice-president at Kasikornbank.
Beneficiaries of the lower MRR are mortgage borrowers, while those who owe unsecured loans, both personal loans and credit card loans, will barely see any benefit.
Although the lending rate cut will draw those who are shopping for homes to make a faster decision in applying for housing loans, such demand for mortgages is not expected to aggravate the country's elevated household debt, Mr Wirawat said.
Under the tougher LTV regulations supervising housing loans and the central bank's new DSR guidance, these policies are sufficient to keep a lid on Thailand's swelling household debt, he said.
"Down payment is a key factor for housing loan applications, while funding source accessibility is a more important factor for SMEs than interest rates," Mr Wirawat said.
FURTHER EASING URGED
Chanintr Chalisarapong, president of the Thai Tuna Industry Association (TTIA), said business operators are calling for commercial banks to reduce the MRR and MOR by a further 0.5-1% to lend support to exports, tourism and real estate because the current rates are not attractive enough to embark on investment and business expansion.
Financial institutions have passed on the central bank's 25-basis-point policy rate cut, but Mr Chanintr said such a move is insufficient to support Thailand's economic growth and businesses because there has been no tangible impact and the baht's value is still strong.
"Currently, the global economy is suffering [simultaneously] from the trade war and currency war between the US and China," he said. "The commotion has hit Thailand's economy."
The TTIA also calls for the central bank to ease the benchmark interest rate because business operators are confident that commercial banks have more room to reduce interest rates for lending.
"The latest cut of the policy interest rate could not stop foreign hot money flowing into Thailand and did not yield any effect for companies, as the baht remains the strongest currency in the region," Mr Chanintr said.
Exports, tourism and real estate account for over 70% of the country's GDP. These sectors are sensitive to foreign exchange volatility.
Interest rate reductions could lend additional support to businesses and reduce financial costs, but the existing impact remains minuscule, he said.
A similar request was voiced by Chonrungsee Chalermchaikit, president of the Federation of Thai SMEs, who said the federation has asked the central bank to lower the policy rate further in a bid to push commercial banks to cut lending rates.
"Existing rates are not enough to support SMEs, and the financial costs of companies remain high, while retail borrowers have to shoulder financial burdens," Ms Chonrungsee said.
SMEs lack the ability to absorb risks stemming from the trade war and currency war, unlike large corporates, she said.
Supattra Paopiamsap, deputy group chief executive of Pruksa Holding Plc, said a decline in interest rates can help boost domestic investment and propel economic growth.
"Lower interest rates will help revive housing demand and home purchasing power in the second half after the residential market was hit by the new lending curbs in the second quarter," she said.
Lower interest rates could also help companies finance their investment plans at a lower cost through debenture issuance.
"Lower interest rates can help some homebuyers who have almost obtained mortgage loan approvals to certainly receive them," said Tritecha Tangmatitham, managing director of Supalai Plc.
Varangkana Artkarasatapon, assistant executive vice-president for finance and new business development at Sansiri Plc, said a downtrend in interest rates will help the property market in the second half.
Lower interest rates will not only help homebuyers to obtain mortgage loan approvals more easily, but also urge investment buyers to buy condos for rent, she said.
Advertisements for personal loans. Household debt is a key concern dragging economic growth momentum. PATTARAPONG CHATPATTARASILL