Government efforts to tackle informal debt and loan sharks are a good starting point to reduce the household debt crisis, but this could prove a strenuous task, say researchers and industry leaders.
They urged the government to focus on the root of this long-standing problem by ensuring fair income distribution and economic benefits, creating high-income employment opportunities for people.
Prime Minister Srettha Thavisin said resolving the informal debt problem, which he likened to modern-day slavery, is a national agenda item, launching a series of measures recently.
These initiatives involve various agencies collaborating with the Interior Ministry and the National Police Bureau to prevent unregulated lending.
The measures include assisting debtors, mediating and reconciling disputes, vigilance, prevention and stringent actions against intimidation and unfair treatment in debt collection.
Once the mediation process is complete, the government will assist in restructuring the debt.
Household debt is estimated at more than 90% of Thai GDP.
The government conservatively estimates informal debt at 50 billion baht, adding the problem cannot be eased without state intervention.
However, economists are unsure how well these initiatives will work.
GROWTH FACTOR
Kasikorn Research Center (K-Research) supports the government's measures to help debtors, including both formal and informal debt.
"This is a good starting point to ensure equitable treatment for borrowers, particularly in terms of interest rates charged," said Burin Adulwattana, managing director of K-Research.
Initially the government is focusing on the debt of around 3 million government officers.
If the debt of this segment can be reduced, it would increase purchasing power and domestic consumption, contributing to the economy, said Mr Burin.
"Normally personal debt rises by 3% per year, which is higher than annual GDP growth. If the government does nothing, the problem will escalate and dampen purchasing power and the economy," he said.
Mr Burin said economic growth is the key factor to strengthen the debt payment ability of borrowers as the income of both business and household sectors improves.
The government's debt restructuring measures cover student loans and loans to government officers and agricultural cooperatives.
"The state measures should weigh the moral hazard associated with wilful defaulters," he said.
"Otherwise, it would have a negative impact on the credit discipline of borrowers and debt resolution will not be achieved."
From January to October this year, domestic car sales fell by 7.51% year-on-year to 645,833 units. Pattarapong Chatpattarasill
UPHILL TASK
The government has pushed ahead with a raft of options to deal with both formal and informal debt, but they do not necessarily guarantee a successful outcome, said the Federation of Thai Industries (FTI).
"The government has made a good start by proposing methods to ease the debt crisis, but it is not easy to translate them into action," said Kriengkrai Thiennukul, chairman of the FTI.
This is because the authorities need the cooperation of creditors, especially those who grant informal loans, he said.
The government is aware of the problem and last week launched various measures dealing with formal debt, including the suspension of repayment and the reduction of interest rates.
Thailand badly needs remedies for the burgeoning debt, which has dealt a blow to the economy, said Mr Kriengkrai.
Surapong Paisitpatanapong, vice-chairman of the FTI and spokesman for its Automotive Industry Club, said high household debt is partially responsible for the decline in domestic car sales as concern over non-performing loans (NPLs) caused banks to adopt stricter criteria for auto lending.
From January to October, domestic car sales fell by 7.51% year-on-year to 645,833 units, down from 698,305 units in the same period last year, with pickup sales plunging by 29.8% to 227,342 units.
Thailand's Manufacturing Production Index declined by 4.29% year-on-year in October to 89.4 points as people are more cautious about spending in a sluggish economy.
Businesses face higher financial costs, while consumer purchasing power is pressured by high household debt, Siripen Kiatfuengfoo, deputy director-general of the Office of Industrial Economics, said earlier.
"The government may ask state-owned and commercial banks to help control the debt problem, but these banks are worried about loan repayment ability," said Mr Kriengkrai.
He suggested the government implement measures to increase income for people because this can help them settle their debt and often increases spending, eventually stimulating the economy.
The move would be a boon for the manufacturing sector as factory operators will produce more goods to serve higher demand, said Mr Kriengkrai.
"The purchasing power of low-income and middle-income earners has significantly weakened, causing everyone to save money," he said.
"Small and medium-sized enterprises [SMEs], which are gradually recovering from the impact of the pandemic, are reluctant to make new investments."
NO EASY ANSWERS
Kanjana Chockpisansin, head of research at K-Research, said informal debt is "quite a concern" and nobody is sure about its extent.
Based on government data, the minimum estimate is 50 billion baht, but some pundits put the figure as high as 1 trillion baht.
"Informal lending is the last resort for many households, though the interest rate is much higher than for formal loans," said Ms Kanjana.
"Low-income earners may turn to loan sharks because they cannot obtain loans from the formal banking system and feel they have no other options."
One problem that could hamper government debt efforts is identifying the loan sharks, as many of them might not want to be identified, she said.
To effectively reduce informal debt, the government needs to create a checklist of every process, including identification, negotiation, mediation, debt restructuring and repaying debt, said Ms Kanjana.
In addition, informal debt is a cyclical problem, with a certain amount of informal debt paid down at the same time new informal debt is incurred by other borrowers, she said.
Tawatchai Asawapornchai, deputy managing director of ASL Securities, said the market is waiting for more details about the government's debt relief plan in terms of proposed interest rates and payment period extension.
Debt restructuring for SMEs could have both positive and negative impacts for listed companies on the Stock Exchange of Thailand, said the brokerage.
Household debt is elevated in Thailand, exceeding 90% of the nation's GDP.
Financial institutions and large banks such as Siam Commercial Bank (SCB) and Kasikornbank are unlikely to face a significant impact, said Mr Tawatchai.
Companies in the finance sector, such as Krungthai Card, are likely to realise some benefits, but not as much as banks if the debts are restructured with lower interest rates, he said.
Asia Plus Securities (ASPS) predicts the debt restructuring would be done mostly through state-owned banks, meaning less of an impact on large commercial banks that already comply with the Bank of Thailand's restructuring guidelines.
Car loans form part of the central bank's debt restructuring plan, so the potential effects on Tisco Financial Group, Kiatnakin Phatra Bank, Bank of Ayudhya, TMBThanachart Bank and SCB, as well as non-bank stocks including Muangthai Capital, Ngern Tid Lor and Srisawad Corp, are unlikely to be significant, according to ASPS.
THORNY ISSUE
Anusorn Tamajai, director of the Digital Economy, Investment and International Trade Research Center under the University of the Thai Chamber of Commerce, said household debt has been a long-term obstacle for Thailand, exacerbated by a prolonged period of low income growth and GDP below its potential growth level for several years.
The recent impact of Covid-19 lockdown measures intensified this decline, he said.
According to Mr Anusorn, Thailand's household debt, which exceeds 90% of GDP, may hold back the country's economic expansion, posing risks to financial stability and potentially becoming a societal problem that is difficult to address.
"The debt relief measures implemented by almost every government have only alleviated the household debt crisis rather than addressing the root cause of indebtedness," noted a Bank of Thailand audit committee.
"Furthermore, such measures may lead to an increase in moral hazard within the financial system, accumulating risks for a future financial system crisis, if they are not executed effectively and if they are utilised frequently."
To tackle household debt more effectively, Mr Anusorn said it is imperative to distribute income and economic benefits fairly, creating high-income employment opportunities for people while enabling industries to add value through knowledge and innovation.
In addition, product processing can be utilised to fetch higher prices, he said.
The government should also reduce the legal reserve ratio of financial institutions, easing criteria for provisioning of bad debts or NPLs for banks, while providing tax deductions for the sale or transfer of assets that do not generate income for financial institutions, said Mr Anusorn.
To address informal debt, he advised the government to set interest rates based on the risk profile of borrowers for all types of financial institutions within the system, and promote competition and transparency to reduce interest rates in the market without setting a ceiling.
Setting a ceiling would restrict access to credit for certain groups of borrowers, leading them to seek informal loans, said Mr Anusorn.
Efforts should be made to encourage responsible lending, with guidelines for debt-to-income ratios to prevent households or businesses from taking on excessive debt, he said.
Households with persistent debt should be closely supervised and managed, said Mr Anusorn.
"Being unable to repay debt is mostly not a result of excessive borrowing or being financially undisciplined, but rather it is linked to unemployment and significantly reduced income during an economic crisis such as the pandemic," he said. "The unemployment situation has notably improved as the rate shrinks and many businesses face a labour shortage. However, income from employment has not increased substantially."
According to Mr Anusorn, with Thailand's economic growth anticipated to be less than 3% this year and interest rates elevated, the financial conditions of both the public and private sectors are expected to be negatively affected.
Mr Burin says economic growth is the key factor as it strengthens the debt payment ability of borrowers, as the income of both business and household sectors improves.
FIRST CUTS
Sanga Ruangwattanakul, president of the Khao San Road Business Association, said one indication of the overwhelming debt is the decreased spending on entertainment, which is typically the first expense to be cut when people need to save money to pay off debts, particularly home or car loans, or other living costs.
He said the main demographic for entertainment venues is the younger crowd, who spent a lot before the economy turned sluggish. This group has been affected, as entertainment venues on Khao San Road reported it decreased by 30% since the beginning of this year, said Mr Sanga.
"Locals cut their entertainment expenses first when they face financial problems," he said. "Even those who still have purchasing power have reduced their recreational activities as they are concerned about the economy and the problem of high household debt."
Additional reporting by Somruedi Banchongduang and Narumon Kasemsuk