As authorities try to ease swelling household debt, the Bank of Thailand plans to implement responsible lending guidelines to improve loan quality in the financial system, starting on Jan 1, 2024.
With the new guidelines, the regulator is attempting to assist retail borrowers exit the debt cycle faster, Suwannee Jatsadasak, assistant governor for the supervision group at the central bank, said in an exclusive interview with the Bangkok Post.
New guidelines
Ms Suwannee said there are several guidelines under the responsible lending approach, expected to begin from Jan 1 next year.
The regulator wants financial institutions, including commercial banks, specialised financial institutions and non-banks to continue to help borrowers who cannot repay debt normally with debt restructuring.
Financial institutions are required to provide debt restructuring (DR) for retail debtors and small and medium-sized enterprise debtors that have not been classified as non-performing loans (NPLs).
For NPLs, the central bank requires financial institutions provide troubled debt restructuring (TRD), defined as a creditor granting a concession to a debtor that it would not normally consider prior to NPL sales, or entering the legal process. The new DR and TRD regulations take effect from January 2024.
The responsible lending guidelines also cover ad campaigns for new loan offerings.
The regulator prohibits ads and marketing campaigns that encourage excessive borrowing and could exacerbate Thailand's household debt.
"The Bank of Thailand demands banks and non-banks affix a warning that reads 'borrow as necessary and make sure you can afford to pay back' on their loan ads, similar to cautions on investment ads that read 'investors should study information before making a decision on investment'," she said.
"These warnings should increase awareness of responsible lending among both financial institutions and borrowers. The central bank is also against quotes for easy loans."
The Bank of Thailand tested the lending warning with vulnerable retail borrowers such as housekeepers and security guards, and they understood the wording, said Ms Suwannee.
With these guidelines, the regulator also wants banks and non-banks to consider the debt repayment capability of borrowers before offering them loans, she said.
Debt solution
Reducing interest rates is one option to handle household debt, particularly for vulnerable borrowers who carry persistent debt (interest payment exceed principal payments over the past five years), said Ms Suwannee.
The central bank plans to assist debtors with revolving personal loans, persistent debt (PD) and low income, helping them to fully repay loans within five years with an interest rate ceiling of 15% per year, compared with the current ceiling rate for personal loan products at 25%.
The new PD measures start from April 1, 2024, giving creditors time to adjust their operations and gradually apply them based on debtors' income levels, which vary across different creditor groups.
"We plan to promote the debt solution scheme through social media, money coaches and influencers prior to its implementation to encourage people to exit from the debt cycle," she said.
The regulator divides PD borrowers into two groups: general and severe. General PD borrowers have been indebted for three consecutive years, while severe PD borrowers have been indebted for five consecutive years with a minimum monthly income of 20,000 baht at banks or 10,000 baht at non-banks.
The central bank is requiring financial institutions to report PD borrowers to it before the new regulation is enforced, said Ms Suwannee.
The regulator is also allowing debtors with performing, revolving personal loans to participate in the PD scheme on a voluntary basis. As a result, no specific target was set for participants, she said.
"It is quite hard to assess both the number of participants and successful individuals," said Ms Suwannee.
"But hopefully around 10% of total participants in the PD scheme are able to exit the debt cycle."
The central bank will allow financial institutions to conduct the PD scheme for two quarters before it is supervised and evaluated, she said.
Complaint resolution
Some financial institutions are concerned the regulator is intervening in their internal business procedures, said Ms Suwannee.
The central bank wants to set new standards to sustain the financial system in the long run, even though it may affect some business operations during the transition, she said.
There were around 1,500 inquiries to the central bank during the public hearing process on the responsible lending approach, reflecting that financial institutions are concerned about the issue, Ms Suwannee said.
"The central bank acknowledges the new regulations would entail more expenses as well as loan-loss provisions for the banking industry," she said.
"However, this is within the banks' capability as the industry's profitability has been improving in the aftermath of the pandemic."
Loan-loss provisions in the commercial banking sector were roughly 230 billion baht in 2020, declining to 170-180 billion during 2021-22.
Provisions are expected to continue declining from the pandemic period, in line with the country's economic recovery, said Ms Suwannee.
The NPL coverage ratio for the banking sector is well-maintained in the range of 170%, she said.
Normalising payments
Ms Suwannee said the central bank will normalise the minimum payment rate for credit cards after it relaxed the regulation during the pandemic.
The regulator currently allows credit cardholders to repay debt at a minimum rate of 5% of the total balance per month under its debt assistance measures to help consumers cope with the impact of the pandemic.
The minimum credit card payment rate is scheduled to rise to 8% in 2024 before returning to the normal 10% in 2025.
The central bank also prepared assistance measures to help credit cardholders who fail to comply with the regulation.
Credit cardholders who are unable to repay their balance at the minimum 8% rate next year can switch to credit cards with a current ceiling interest rate of 16% per year.
The regulator said up to 80% of credit cardholders can repay their debt at the minimum payment rate of 10%.
She said the central bank will encourage credit card providers to inform and seek understanding with cardholders about the increased minimum payment.
The regulator believes both financial institutions and cardholders have adequate time to prepare for the new minimum payment rule, scheduled for enforcement starting next year, said Ms Suwannee.
The array of new central bank measures should help address debt problems, control new borrowing and reduce household debt to a more sustainable level, she said.
