An interest rate incompatible with banks' financial costs is the main reason the Bank of Thailand's soft loan programme has floundered, according to a source at a state-owned financial institution.
The central bank has been offering 500 billion baht in soft loans at 0.01% interest to financial institutions for two years to re-lend to small and medium-sized enterprises (SMEs), with a maximum credit line of 500 million baht at 2% interest.
The government will absorb interest charges for six months for SMEs that receive soft loans.
To be eligible, SMEs must operate domestically, be non-listed companies, have a credit line of up to 500 million baht from financial institutions, and continue to service debt or make late payments of less than 90 days at the end of last year.
The maximum drawdown for the soft loans is set at 20% of each bank's loans outstanding at the end of December. The government will partly compensate financial institutions for losses that are incurred.
The soft loan cost incurred by the central bank is 1 satang, and the central bank offers the loan to commercial bank at a cost of 2 satang in a bid for banks to relend to their own customers at no more than 2%, said a banking source speaking on condition of anonymity.
Most banks do not want to offer the soft loans at a low interest rate, despite having a low lending cost, as their financial burdens exceed more than 2%, said the source.
For instance, a medium-sized bank with a loan portfolio of no more than 200 billion baht would have an average financial cost at 2.5%.
If the bank offers soft loans at a 2% interest, it would face a loss of 0.5%, said the source. Banks also do not want to shoulder higher bad debts, as a rise in non-performing loans will compel them to set up higher reserves, which subsequently affect banks' share prices, according to the source.
The capped interest for the soft loan scheme was previously set at 3%, but policymakers ultimately stipulated the interest to be no more than 2%.