Variety of tactics to prevent SME loans from turning sour
Despite being overshadowed by large conglomerates in size and financial stature, small and medium-sized enterprises (SMEs) have long been the backbone of Thailand's economy, helping to fuel the engine of growth for decades.
This backbone has been buckling, ravaged by the pandemic, with strict measures to contain the outbreak sapping firms' cash flow, leading to shutdowns or employees being laid off.
In 2019, Thailand had roughly 3 million SMEs and startups, including community enterprises, according to the Office of Small and Medium Enterprises Promotion.
Of those, 700,000 registered SMEs are under the corporate tax system, while 2.3 million SMEs are micro-size companies.
In an attempt to help struggling businesses and retail borrowers, the central bank laid out four categories of relief measures, spanning multiple types of policies such as interest rate reduction, debt payment deferment and reduction, provision of additional credit and debt restructuring.
There have been two phases of debt relief measures. The first started in April and the second in July.
The first aid programme ended on Oct 22.
The Finance Ministry, the Bank of Thailand and commercial banks are joining hands to ward off rising bad loans from the economic slowdown as the central bank's debt relief measures will expire this month.
Lavaron Sangsnit, director-general at the Excise Department and former director of the Fiscal Policy Office, said the three parties discussed methods to prevent non-performing loans (NPLs) from escalating two months ago, with the agreed approach aimed at restructuring debts shouldered by SMEs who are unprepared to exit the debt relief programme.
The debt restructuring approach consists of extending the debt repayment period and continuing the suspension of debt repayment, depending on the financial health of each debtor, said Mr Lavaron.
The Bank of Thailand announced in October implementation of targeted debt moratorium measures, scheduled to end next June, for SMEs with a credit line below 100 million baht that have difficulty servicing existing debts.
The targeted measures are scheduled to end on June 30, 2021. They only apply to targeted SMEs that cannot cope with repaying loans to financial institutions because business operations have not fully recovered.
The central bank will let banks and non-bank companies negotiate with debtors as to whether they can repay debts normally, or prefer to continue with the debt moratorium scheme for another six months.
The central bank previously prepared for debt restructuring through a programme for businesses (DR BIZ) under a creditors' pool concept and debt consolidation, using mortgages as collateral for the restructuring of unsecured loans.
For commercial banks, the idea of loans deteriorating into NPLs is not desirable as they will have to set aside higher loan-loss reserves.
If SME loans were to become NPLs after the programme ended, a vicious cycle could occur where commercial banks would have to beef up loan provisions, subsequently affecting their net profits and share prices.
Higher SME NPLs would also affect Thailand's sovereign credit rating, which in turn incurs a higher borrowing cost.
Rak Vorrakitpokatorn, president of the state-owned Thai Credit Guarantee Corporation, said if the government approves the 200-billion-baht portfolio guarantee scheme (PGS) 9, SME loans would have help in preventing bad debts from deteriorating.
SME loans total 6 trillion baht in the formal loan system, said Mr Rak. Of those, 340 billion baht have turned into sour loans and 700 billion are classified as special mention loans, defined as loans overdue by more than one month but less than three months.
With the help of PGS 9, the NPL ratio is expected to be 6-8% of total SME loans. But the ratio would stay between 7-9% without PGS 9, said Mr Rak.
The PGS 9 proposal is being deliberated under the fiscal 2021 budget in parliament. The loan guarantee amount could be reduced to 100-150 billion baht if approved.
NO SWITCHING OFF
Nartnaree Rathapat, managing director at Small and Medium Enterprise Development (SME D) Bank, said the bank is ready to restructure debt for struggling borrowers.
If SME debtors were left isolated during this time, it would be tantamount to switching off an engine, where rebooting would be difficult, said Ms Nartnaree.
"If the engine remains in operation, hence allowing businesses to carry on, new opportunities will arise when the economy starts recovering," she said.
"Reducing instalment payments or extending the payment period are methods the bank implements to help customers."
The loan value extended to SME D Bank customers who qualified under the central bank's debt suspension programme totals 60 billion baht.
Of the total, 25 billion baht comes from borrowers classified as having inconsistencies in loan repayment for the principal amount and interest.
An assessment is being made on how much of these loans will turn into NPLs, said Ms Nartnaree.
Before the central bank implemented the debt relief measures, SME D Bank customers with total loan value of 400-500 million baht were unable to repay their loans.
If the central bank's debt relief measures are not extended, SMEs that have been reeling from the economic slowdown will be affected, said Ms Nartnaree.
"Some customers hold the view that they should have cash on hand since the economy is not doing well, instead of repaying bank loans," she said.
"However, other customers are of the opinion that debt defaults will result in a loss of credit and subsequently affect their future borrowing."