Gnawing away at mounting debt

Gnawing away at mounting debt

Relief measures are available for borrowers in over their heads

Customers wait to be served at a branch of Siam Commercial Bank in Bangkok.
Customers wait to be served at a branch of Siam Commercial Bank in Bangkok.

Many borrowers are still faced with heavy debt burdens amid the coronavirus outbreak, with most having been pressured by diminishing income and lower debt-servicing ability.

In the wake of worsening economic conditions aggravated by the virus crisis, both regulatory bodies and financial institutions have implemented several debt relief measures to help borrowers overcome difficulty.

Borrowers who want to ease financial burdens can go to lenders asking for debt relief measures. If you cannot pay back loans under the existing conditions, you should visit the bank immediately before your unpaid loan is classified as a bad debt and subsequently branded with a bad credit score.

If your loan is classified in the non-performing loan (NPL) segment, you can ask the creditor for easing debt conditions as well.

Before going to the bank, you should have some idea about monthly instalments in line with your existing income and capability for debt repayment. These are the Bank of Thailand's tips to ease excruciating financial burdens amid the difficult situation.

DEBT RELIEF SUGGESTIONS

There are eight methods for debt relief recommended by the Bank of Thailand, all of which are under the central bank's policy to ease consumer debt burdens while the crisis persists, with financial institutions complying with the guidance.

An extension for debt instalment periods is the first recommendation. This is a popular instrument to ease monthly debt payment in accordance with lower income.

For instance, when a borrower has a loan contract with a bank for 10 years and the borrower has paid the loan for six years, but the virus outbreak lowers his/her ability to make existing monthly instalments for the remainder of the four years. In this case, the borrower can request prolonging the remaining loan repayment period by 1-5 years in order to reduce monthly debt service.

The creditor will also consider the borrower's age in accordance with the remaining debt-servicing period. The remaining years of debt restructuring should not be more than eight years.

Second, a suspension of principal or "debt holiday" to stop loan repayment temporarily comes to mind when borrowers are facing difficulty repaying their debts.

Normally, an instalment loan is divided into two parts, principal and interest. For example, a bank sets an instalment of 20,000 baht per month, of which 8,000 baht is the principal and the remainder is interest.

Under a grace period for principal, a borrower is allowed to pay only interest at 12,000 baht a month, a move to ease the borrower's financial burden.

This instrument, however, will not reduce the principal repayment during the debt suspension period. While debtors are relieved of financial burden at present, borrowers will be faced with a higher amount of monthly instalments later down the contract period, also known as "ballooning".

Banks will provide borrowers with a grace period for principal loans for 3-6 months, per the central bank's debt relief measures.

In the event of improved financial conditions, you can repay your debt in a bigger amount than the monthly repayment in order to reduce the principal. This method will also help you to pay off that nasty debt faster.

Interest rate cuts are the third option. Lower lending rates help lower financial burdens for borrowers.

For instance, when a borrower is charged the minimum retail rate (MRR) of 2%, but he/she cannot pay the rate as income is shaved by the crisis, the borrower can ask the lender for an interest rate cut.

Basically, banks will take into account several factors for cutting the loan rate for a customer. These include a borrower's debt repayment record, type of loan, loan collateral and the bank's financial cost.

As the rate-setting Monetary Policy Committee has reduced the benchmark interest rate gradually to sustain economic conditions battered by the pandemic crisis, this also helps lower loan rates of prime interest rates, such as the MRR, minimum lending rate (MLR) and minimum overdraft rate (MOR). On average, the prime loan rate has declined by about 2 percentage points from the end of last year until now.

In addition, the regulator requires financial institutions to cut ceiling rates for credit cards, personal loans and car title loans by 2-3 percentage points under the central bank's debt relief measures.

Banks will take into account several factors when cutting the loan rate for a customer. Varuth Hirunyatheb

INTEREST CONVERSION

The fourth option is the cancellation or relaxation of penalty interest rates. The central bank has required financial institutions to charge the penalty rate based only monthly debt default to ensure fairness to borrowers. With this regulation in place, the interest rate charge should be reasonable for borrowers to service their debt, which will in turn possibly prevent NPLs from rising significantly.

Fifth is additional credit line offerings. Amid the economic downturn and geopolitical uncertainties, working capital given to small-business operators is an instrument helping them overcome the crisis. Customers who want additional credit lines to support business liquidity should prepare for business feasibility plans spanning the next 6-12 months for lenders' assessment.

For instance, business operators should estimate their fixed costs, including wages, raw material expenses and utility fees.

Basically, banks will approve additional loans for customers who have a good history of debt repayment for both the principal amount and interest. Banks will also evaluate how a credit line on additional working capital will account for total liabilities for a business operator.

The sixth tactic is converting short-term loans to long-term loans or from revolving loans to term loans.

Normally, revolving loans are charged at higher rates than term loans, so borrowers can reduce their interest burden when converting from revolving loans to term loans.

For example, the ceiling interest rates of 28% and 18% are applied to a small-business operator that uses a cash card or credit card loan. But when converting to term loans, the charged rates would be prime lending rates in the range of 5.25-6.05%.

Debt refinancing is the seventh option. Borrowers using this method would get better loan conditions such as lower interest rates, but they have to pay for loan management fees. Basically, borrowers can refinance from an existing bank to a new bank after completing an instalment for the first three years and having a good repayment record.

Lastly, you can close a loan account by paying off the existing debt. You can escape your debt burden with this method if you manage to raise money by asset sales, borrowing from relatives or using your savings. Negotiating with your creditor for a certain discount to pay off the debt can be done, but it is difficult if the collateral value is higher than the debt amount.

In the latest move to assist debtors, the central bank has announced a debt consolidation measure for retail debtors by allowing debtors to undergo debt restructuring by consolidating unsecured loans, such as credit cards and cash cards, with mortgage loans.

Debtors' houses would be used as collateral for this debt restructuring process. The measure applies only to those who borrowed from the same lender.

Mortgage loans must not be classified as NPLs, while unsecured loans can be classified as either NPLs or performing loans.

Interest for mortgage loans will remain unchanged, while interest for debt restructuring by using debtors' houses as collateral will be based on the MRR.

The period of extended debt repayment will have to be negotiated by the borrower and lender. The measure will run from Sept 1, 2020 to Dec 31, 2021.

DEBTOR'S PLEA

Nathawan Chimthaworn, 34, an employee of a private company, said she asked for an interest rate cut for her mortgage from Siam Commercial Bank (SCB) after being affected by the government's lockdown policy. With strict lockdown measures imposed to contain the coronavirus on home soil, the company, which organises events, was at a standstill.

Despite getting her normal monthly salary, the lockdown policy had affected her overtime income. As a result, the amount of monthly income she usually earns diminished considerably.

Although SCB offers several debt relief measures such as debt holiday and extended loan repayment, such instruments were insufficient for Ms Nathawan's actual needs. The interest rate cut would help her ease compounding financial burdens and ensure that she repays the debt normally.

She presented evidence to the lender about her lower monthly income, which weakens her debt-servicing ability under the existing conditions. At the same time, she also showed a good payment record during the past four years of instalments.

"With a lower interest rate charged, I can service the debt normally and still be classified as a good customer," she said. "If the situation returns to normal and I can earn a higher income, I plan to reduce the principal to shorten the instalment period from the existing 20 years to lower repayment risk amid economic uncertainties."


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