BoT to mull ceiling rate reduction
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BoT to mull ceiling rate reduction

Cut of 1-2% likely to curb debt burden

Ceiling interest rates of consumer loan products, which are currently over 20% per year, are expected to be reduced by at least 1-2%, following calls by the government for the Bank of Thailand (BoT) to review interest rates for credit cards and personal loans to tackle household debt.

An executive of a financial institution, who requested anonymity, said the central bank will hold a meeting with financial institutions this week to discuss reduced ceiling rates for some consumer loan types.

The focus will be on retail loan products with interest rates above 20% per year, including personal loans, car title loans, and nano-and pico-finance.

"The ceiling rates are expected to be reduced by 1-2% and will run until the end of next year at least. The ceiling rate reduction and other relevant details should conclude by next week," the source added.

Under the BoT's debt restructuring programme for retail loans to ease the financial burden of individual borrowers amid Covid-19, the regulator has reduced the annual ceiling rate of personal loans from 28% to 25%, car title loans from 26% to 24%, and credit card loans from 16% to 12%. However, regulators have set the ceiling rates of nano-finance and pico-finance at 33% and 36%, respectively.

The source said the cut would focus on existing retail loan borrowers, who are charged higher rates than interest rates under the central bank's debt restructuring measures.

The main groups that will benefit from the cut are those impacted by the Covid-19 pandemic and grassroots people. The rate cut will not help increase the ability of fragile borrower groups to repay their debt but ease financial burden.

"The ceiling rate cut will help borrowers maintain residual income. Initially, it is expected that every 1% cut will help reduce total interest payments by around 2.5 billion baht per year," he said.

However, the rate cut will affect non-banks, auto loan and car title loan providers, which are key players in consumer loan products, rather than commercial banks. Overall, financial institutions will feel the impact of lower interest income.

Last week, Prime Minister Gen Prayut Chan-o-cha asked the central bank to review interest rates for credit cards and personal loans to try to tackle high household debt. The measures prepared for solving debt problems include reducing peoples' interest rate burden, debt repayment adjustments and promoting competition for lower interest rates.

Thailand's household debt stood at 14 trillion baht in 2020, equal to 89.3% of gross domestic product (GDP).

According to data from the central bank, as of December 2020, the household debt burden was the result of credit cards and personal loans. The debt burden covering principal loans and interest for these two unsecured loan products represented 58% of total consumer loans.

According to National Credit Bureau's data as of the fourth quarter of 2020, total household debt outstanding was 12.24 trillion baht, of which 519.71 billion baht were credit card loans, growing 1.2% year-on-year.

The other 2.41 trillion baht were personal loans, rising 12.2% year on year; 2.47 trillion baht were auto loans, declining 1.4% year on year; 4.3 trillion baht were housing loans, rising 6.8% year on year; 359.52 billion baht were overdraft loans, falling 40.8% year on year; and 2.17 trillion baht were other loans, growing 3.3% year on year.

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