A central bank economist forecasts a crossroads for the country's household debt over the next four years, either rising to 92.8% of GDP or declining to 79.1%.
If Thai household debt grows at 1.2 times GDP, average growth over the past five years, the country's household debt will increase to 18.1 trillion baht or 92.8% of GDP by 2025, up from 14 trillion in 2020 or 89.3% of GDP, said Don Nakornthab, senior director of the financial stability department at the Bank of Thailand.
If household debt increases sustainably at 2% per year on average, Thailand's household debt will rise to 15.4 trillion baht or 79.1% of GDP by 2025.
He predicted the country's household debt in the first quarter of 2021 grew by around 5% year-on-year. In the fourth quarter of 2020, Thai household debt grew by 3.9% year-on-year.
The Bank for International Settlements threshold recommends the household debt ratio of a country not exceed 85% of GDP.
According to data from the central bank as of December 2020, the household debt burden was largely the result of credit card and personal loans. The debt burden covering principal loans and interest for these two unsecured loan products represented 58% of total consumer loans.
Mr Don proposes three options to curb the country's household debt and strengthen household income for the post-Covid era. The options comprise: debt restructuring, a debt haircut, and limiting new loan creation.
The central bank began a debt restructuring programme during the first wave of Covid-19 in March 2020.
A debt haircut is an option under the Bank of Thailand's third phase of debt relief measures for auto loan borrowers on a case-by-case basis. The haircut is offered to borrowers with a good payment record and limited debt following a car auction.
"We need to pay attention to debt restructuring first to help household borrowers overcome the crisis. In the post-Covid era when the economy recovers, we need to pay more attention to reducing household debt as this is instrumental for sustainable economic growth in the long run," he said.
Slowing new consumer loans will be a key factor to curb household debt in the post-Covid period, said Mr Don. The central bank's responsible lending policy supports financial institutions growing new loans reasonably.
Macroprudential measures through debt service ratio (DSR) containment is another mechanism to limit new loan creation, especially for credit card and personal loans, he said.
"We can improve the DSR of the overall financial system by limiting credit cards for borrowers or declining credit lines offered for personal loans. Several central banks in the region supervise unsecured loan products with such measures," Mr Don said.
National Statistical Office data found the DSR of the local financial system is 40% on average. However, central bank data from a report on financial institutions found the ratio exceeds 40%.