The Covid-19 outbreak and travel restrictions imposed by many countries have kneecapped Thailand's tourism industry and the whole supply chain of the services sector, with a spillover effect starting in the financial sector.
The pandemic and domestic measures adopted to curb the spread have induced income shocks in Thailand, where the ratio of household debt to GDP is among the highest in Asia.
The fast-spreading outbreak is forcing many provinces including Bangkok to temporarily close all malls, schools, entertainment and sporting venues, while allowing food stalls and restaurants to open only for take-out and delivery, pumping up the unemployment rate and the number of people who take leave without pay or a pay cut. The virus is also pummelling small businesses.
With the economy struggling, this has triggered fears of an upsurge of individual debtor and small and medium-sized enterprise (SME) defaults in the coming months.
"There continues to be a need to monitor credit quality, which deteriorated from 2018 notably for SME loans," said the Bank of Thailand in its Financial Stability Report 2019. "Once concentrated among smaller-sized SMEs, signs of default begun to spread to larger SMEs, some of which were affected by the slowing economy."
NEGATIVE OUTLOOK
The pandemic comes at a relatively challenging point in Thai banks' business cycle. The banking sector's performance indicators had already been weakening over the past few years from muted economic conditions, sustained low interest rates and competitive forces that reduced growth in fee income, according to Fitch Ratings Thailand.
"The coronavirus outbreak has added considerably to these pressures, with the recently announced shutdown intensifying a macroeconomic slowdown that started in the later part of 2019 due to US-China trade tensions, a delayed budget and drought," said Parson Singha, senior director at Fitch Ratings Thailand. "This will lead asset quality and earnings to be significantly worse than our previous expectations."
Asset-quality metrics have been in a negative trend for many years, and the industry now faces a re-escalation of non-performing loan (NPL) growth due to the pandemic. The repayment capacity of relatively weaker borrowers would be particularly vulnerable to a prolonged economic downturn.
"In Thailand, this includes the SME client segment, which accounts for around one-third of bank loans," Mr Singha said. "Loan impairments among SME clients had already been trending upwards before the start of the coronavirus outbreak."
The retail client segment will also be affected, particularly non-mortgage consumer lending, which makes up around 16% of total loans, if unemployment increases.
"We have changed the outlook for Thailand's banking system to negative from positive," said Moody's Investors Service. "The operating environment for the country's banks will deteriorate in the next 12-18 months due to disruptions from the coronavirus outbreak, and this will lead to a weakening of banks' asset quality and profitability. Yet banks' strong capital and liquidity, as well as government support for the broader economy, will provide a buffer against growing risks."
Nine commercial banks accounted for 89% of commercial bank assets in the country as of the end of 2019.
SMEs operating in consumer-related industries and retail borrowers will be affected more severely than large corporates because they have weaker buffers against drops in income, said Moody's Investors Service.
But strong provision coverage will somewhat mitigate the impact of deterioration in asset quality, said the international credit rating agency.
Loan demand will weaken as economic growth slows, Moody's said. Moreover, policy rate cuts will lead to a contraction of net interest margins, while credit costs will rise as problem loans increase.
Thai banks' internal capital generation will slow as profitability weakens, but it will largely match loan growth as the latter also slows, Moody's said.
For leasing companies, they could see greater impacts on their business volume than companies in other non-bank financial institution segments, according to Tris Rating.
Based on Toyota Motor Thailand's current estimate, sales of all types of vehicles are expected to contract collectively by 6.7% in 2020 after a 3.3% decline in 2019.
"However, we believe sales could slip further as the estimates have not taken into account the potential fallout from the Covid-19 pandemic, especially when automakers are suspending production plans," Tris Rating said.
For operating lease, lenders could also face slower demand, given the adverse impact on the manufacturing and export sectors, the agency said.
PAUSING LOAN DEFAULTS
Chatchai Payuhanaveechai, president and chief executive of Government Savings Bank (GSB), said a three-month grace period on principal and interest for personal loans, mortgages and SME loans in compliance with the central bank's guidelines on minimum assistance standards for virus-ravaged debtors is akin to pressing the pause button on special mention loans and NPLs amid the Covid-19 crisis.
The state-owned bank is offering a three-month grace period on principal and interest that is automatically applicable to qualified debtors without any registration requirement, he said.
GSB's personal loan, mortgage and SME loan borrowers who still service debt or make late payment for less than three months as of the end of March are entitled to the financial aid. The qualified debtors must also be those who borrow the bank's personal loan and mortgage with a maximum outstanding balance of 3 million baht and SME loans with an outstanding balance of up to 20 million.
Effective from April 1, all lenders comprising commercial banks, specialised financial institutions and non-bank and leasing companies are required to comply with the central bank's guidelines covering six types of loan product including credit card, personal loans and car title loans, auto and motorcycle loans, machinery leasing, mortgages and SME, nanofinance and microfinance loans.
The bank has also prepared two options in case that the Covid-19 contagion still cannot be contained after the deferment period is lapsed in June.
Both options are an extension of the grace period for another three months, and a two-year deferment on principal to be applied on a case-by-case basis, Mr Chatchai said.
Whether the three-month deferment period will be extended depends on the central bank's policy, he said.
For the two-year principal payment deferment proposal, the bank will let borrowers pay only a half of interest that they are charged if the scheme comes to fruition.
Mr Chatchai said GSB has 15,000 SME loan debtors with a total lending portfolio of 120 billion baht.
The bank's NPLs for SME and housing loans are 4% and 3% of each product's total lending, respectively.
Mr Chatchai said it is unpredictable whether the bank's NPLs will increase as it depends on developments surrounding the virus outbreak.
Some analysts say banks have a sufficient capital buffer in the event of higher past-due payments and debt restructuring.
AMPLE BUFFERS
Thailand's banking sector is strong enough to cushion against a potential upsurge in bad debt and debt restructuring cases stemming from the coronavirus outbreak and official measures to contain the spread, said Don Nakornthab, senior director for the economic and policy department at the Bank of Thailand.
Banks have a sufficient capital buffer in the event of higher past-due payments and debt restructuring, he said.
At the end of 2019, the banking system's capital funds totalled 2.85 trillion baht, with a capital adequacy ratio of 19.6% and loan-loss provision of 701.2 billion baht, according to the Bank of Thailand data.
The NPL coverage ratio was stable at 149.9% at the end of last year, and the liquidity coverage ratio remained high at 187.5%.
Ronadol Numnonda, deputy governor for financial institutions stability, said the central bank is ready to implement additional measures to ease the financial burden of virus-affected borrowers and it wants these debtors to access the financial assistance rapidly.
"Debt burden is the main concern among people in this difficult situation," he said. "The central bank then would collaborate with financial institutions to exercise the best measures to help ease their financial burdens."
DESPERATE FOR HELP
Siam Commercial Bank co-president Apiphan Charoenanusorn said more than 100,000 clients with over 150 billion baht worth of total loans have requested financial aid to ease their burden after the bank launched the scheme in February.
These customers are from all segments, including corporate, SME and retail.
Krungthai Bank president Payong Srivanich said the bank has already helped its 15,000 customers with combined loans of 30 billion baht, while another 70,000 borrowers with total loans of 250 billion baht are in the consideration process.
The bank is providing a three-month grace period on principal and interest for all of its customers who took out personal loans and mortgages with a maximum loan amount of 3 million baht. For personal and housing loan debtors with lower income, they are entitled to a deferment period for up to 12 months.
Thai Hire Purchase Association chairman Teerachart Chiracharasporn said leasing operators will comply with the central bank's guidelines on minimum aid to customers, but the qualifications of those who are eligible for the aid scheme depend on each firm's criteria.
Under the central bank's guidelines, lenders are required to offer their auto and motorcycle loan borrowers to either deter principal and interest payment for three months or suspend principal payment for six months. Those who meet the assistance criteria must have a ceiling loan amount of 250,000 baht for auto loans and 35,000 baht for motorcycle loans.
The association's members are commercial banks and their leasing subsidiaries with total car loans outstanding of roughly 2.3 trillion baht, representing about 60% of the industry's total vehicle loans.
