The Thai Hire-Purchase Association (THPA) has asked the Office of the Consumer Protection Board (OCPB) to increase the maximum interest rate for hire-purchase loans as the business is being affected by rising rates.
Auto hire-purchase lenders have been affected by rising interest rates, which have increased financial costs, but the ceiling interest rates for the segment are capped, said THPA president Sarun Thongtammachart.
As a result, profit margins have narrowed, he said.
Used car sellers offer low down payments and long repayment periods, charging interest rates close to or at the ceiling rate, said Mr Sarun. This segment has no more room to increase the rate, so the THPA is in talks with the OCPB to increase the ceiling rate, he said.
The OCPB issued a new notification regarding hire-purchase contracts for cars and motorcycles, effective Jan 10, 2023. As part of its rules for car and motorcycle hire-purchase contracts, the OCPB set a ceiling rate for new car loans of 10% per year, or an average fixed rate of around 5.5% per year, while for used car loans the ceiling is 15%, or 8.5% for a fixed rate.
Motorcycle loans have a maximum rate of 23%, or 12.5% for a fixed rate.
The OCPB has the authority to adjust maximum hire-purchase interest rates every three years based on the country's economic conditions.
"The regulator agrees with the proposal in principle and understands the market situation amid rising interest rates," said Mr Sarun. "The office wants to study the feasibility as the current ceiling rate has only been in effect for around six months."
He said the OCPB and THPA would continue to monitor the business environment. The regulator is not expected to make a final decision on the proposal this year, said Mr Sarun.
The central bank has increased its policy rate six times since August 2022, rising from 0.5% to 2%.
The Bank of Thailand's Monetary Policy Committee is expected to raise its policy rate by a quarter percentage point to 2.25%, as part of its monetary policy normalisation to curb inflation.
Another rate hike would affect the hire-purchase sector, he said.
As a result, special mention (SM) loans, where borrowers have failed to make payments between 30-90 days after the due date, and non-performing loans (NPLs) are likely to increase.
For the first quarter of this year, SM car loans with banks rose to 13.8% of total outstanding loans, compared with 11.4% by non-banking financial companies.
Bank NPLs for auto loans tallied 1.9%, compared with 2.1% for non-banking financial institutions, according to the central bank's data.
The SM car loan ratio would normally be higher than other consumer loan products because of the increase in the number of confiscated cars.
Mr Sarun said business operators have adjusted their strategies and provided financial assistance to borrowers to handle the higher credit risk. For example, he said some operators offer higher down payments and shorter repayment periods.