Signs of financial vulnerability have re-emerged despite the much-publicised domestic economic recovery, with a rise in non-performing loans (NPLs) sending shivers down the spines of financial regulators and debtors alike.
Commercial lenders' bad loans continued their upticks during the past three quarters despite improving economic conditions, suggesting the possibility of a further build-up in the soured loan ratio that could surpass what is deemed a secure threshold.
Looking at NPLs broken down by loan categories, the small and medium-sized enterprise (SME) segment had the highest bad loans in terms of percentage at 4.65% at the end of September, rising from 4.45% in the previous three months.
Moreover, the upward trend is gaining speed, as witnessed by a rise in special mention loans (SMs), or lending potentially at risk of becoming NPLs, to 2.63% at the end of September from 2.61% in the preceding quarter.
"The build-up of NPLs reflects that it has not reached the peak yet, but the pace [of higher bad loans] has started to slow down," said Somchai Lertlarpwasin, senior director for financial institutions strategy at the Bank of Thailand. "We cannot tell whether the ratio will increase to 3%, as it depends on economic conditions and commercial banks' policies in managing NPLs.
"Some banks now have a policy to manage bad loans by themselves, as it can generate higher income than divestment, [but] the NPL ratio will not decline if that is the case."
Soured SME loans
Given that Thailand's economic growth prospects have become obscured by the Sino-US trade tensions, and economic growth has yet to trickle down to small-business operators, the SME loan segment could be a major stumbling block to a reversal of the NPL outlook in quarters to come.
According to the central bank data on SME NPLs, businesses operating in industry, commerce, services, real estate, construction and infrastructure saw soured loans increase by the end of September from the previous three months, while financial services was the only category in which NPLs fell.
Soured loans in the SME construction sector were the highest at 7.03%, up from 7.02% at the end of June, followed by the industrial sector at 6.91%, up from 6.3%, and the commerce sector at 6.63%, up from 6.48%.
An increase in the NPLs of the manufacturing and commerce sectors could be due to tougher competition from e-commerce business and modern trade filtering into provincial markets, Mr Somchai said.
Surat Leelataviwat, executive vice-president of Kasikornbank (KBank), said the bank's NPL ratio for SME business has levelled out at below 6% of its outstanding loans at the end of September. But it could take a while to bring down the distressed loans, as most of them are vintage NPLs from several years in the past.
Although vintage bad loans have been restructured several times, they have turned sour again because borrowers cannot adapt their operations amid constant changes occurring in the business realm.
"It's not easy to turn vintage NPLs into good assets," Mr Surat said. "Some of the [SME] borrowers have not seen the light at the end of the tunnel yet, so the bank expects the NPL ratio to keep levelling out next year."
KBank, the country's largest SME lender, will still focus on restructuring bad loans rather than unloading them next year, he said, due to better returns.
The bank's conservative SME loan growth target will also deter its NPL ratio from falling significantly, Mr Surat said.
KBank targets 2-3% growth in SME loans next year, down from this year's target of 4-6%.
Mr Surat said the lower growth target for SME loans next year is based on gloomy signs in some SME segments, especially small firms, the commerce sector and businesses located in provincial areas.
Some portion of SMEs cannot adopt innovative technology and adapt to the changing lifestyle of consumers in the digital era. For instance, traditional retailers or commerce businesses have been disrupted by online shopping and e-commerce. Additionally, the farming sector has yet to recover, as farm prices remain low and nominal farm income contracted 4% year-on-year in September.
"Some SME clients expect sales to be lower next year than this year," Mr Surat said. "For example, a customer forecasts annual sales at 18 million baht in 2019, a decline from 20 million this year. With this outlook, the bank has set a lower loan growth target in line with such demand."
TMB Bank, however, set an aggressive target to halve its SME bad-loan ratio to 4% by the end of next year from 8% at the end of September.
The bank is resorting to various instruments to improve asset quality. These include tightened scrutiny of new SME loans, distressed debt restructuring and bad-asset disposal, said chief SME banking officer Chompoonoot Pathomporn.
0% down payment
Central bank data indicated a build-up of both NPLs and SMs of auto and credit card loans at the end of the third quarter compared with the preceding quarter.
Bad auto loans rose marginally to 1.57% at the end of September from 1.52% at the end of June. SMs -- those 1-3 months overdue -- inched up to 7.32% from 7.25%.
Credit card NPLs accelerated to 2.54% at the end of September from 2.42% at the end of June, and the potential future NPLs of credit cards rose to 1.96% from 1.89% during the same period.
Thee Permpongpanth, vice-president for marketing and government affairs at Mazda Sales Thailand, said aggressive growth in the car market is one factor aggravating overall NPLs in hire purchase loans at present.
"Many distributors are pushing harder on their promotional campaigns, particularly 0% down payment," Mr Thee said. "There's nothing wrong with marketing a 0% down payment if each distributor uses this campaign on some car segment that has limited sales volume."
Thailand's auto market has seen significant growth since 2017, when the five-year lock-up period for car ownership expired under the Yingluck Shinawatra government's first-time car buyer scheme.
In 2017, the market grew by 13.4% to 871,650 units sold, marking the first growth in five years, while 2018 sales volume is expected to exceed 1 million cars, which would be a 14.7% year-on-year rise.
This positive momentum has been seen since the beginning of 2018, with auto sales during the first nine months of 746,546 cars, up 20.3% year-on-year.
Most car buyers who took part in the tax rebate programme for first-time car ownership are interested in buying higher-value cars than the old ones, which were limited in engine size to less than 1,500cc.
"Once they decide to buy higher-priced cars, it means they can afford them and have enough purchasing power to pay an instalment," Mr Thee said, adding that these motorists will not buy the new cars if they are aware of their inadequate ability to make instalment payments.
He said the country's car industry contributes 5% to Thailand's GDP and the industry's growth is in tandem with the country's economic growth of 4-4.5%.
Furthermore, many financial institutions can manage their existing NPLs because they can reject any loan application if the prospective buyer cannot service the debt burden.
Such optimism is echoed by Surapong Paisitpatanapong, spokesman for the automotive industry club of the Federation of Thai Industries, who said auto NPLs remain low.
He said the growth of car sales in 2018 has gained momentum from the introduction of new cars with affordable prices for buyers.
"New cars have smaller engine sizes and cheaper prices than in the past," Mr Surapong said. "For example, sport utility vehicles have aggressive competition with small- to mid-sized cars, so the market segment is still very bullish locally."
Although there has been an uptick in auto NPLs, there is little concern because all stakeholders can manage risk, he said.
No decline in sight
Although NPLs technically peaked in last year's third quarter at 2.97%, bad loans are expected to stay high going forward because SMEs have not shared in the benefits of Thailand's economic recovery, said Naris Sathapholdeja, head of TMB Analytics.
While the usual debt write-off and debt restructuring by banks occurs every fourth quarter, this does not mean that NPLs will significantly diminish, Mr Naris said.
Some 55% of outstanding NPLs are derived from SMEs, suggesting headwinds towards SME business operations and sales growth, he said.
Ebbing sales could trickle down to lower employment, he said, noting that SMEs account for 55% of the country's registered workforce.
"SME NPLs have affected employment prospects and will cause consumers' purchasing power to decline," Mr Naris said.
Since there is a high risk cost for commercial banks whose SME loan portfolios are large, higher loan delinquency among SMEs will prompt banks to tighten loan approvals for SME businesses, he said.
Higher loan-loss reserves set by financial institutions in preparation for the International Financial Reporting Standard (IFRS) 9, slated to take full effect in 2020, are also poised to cause banks to scrutinise their loans more stringently.
The days of higher loan growth on top of robust GDP growth are long gone, Mr Naris said, and next year's total loan growth is expected to moderate because of this year's high base.
"The danger for SME NPLs is mainly associated with retailers and wholesalers whose sales have been affected by e-commerce," he said. "Out of 3.3 million SME businesses, 1.2 million are identified as traders. SME NPLs are not expected to be resolved easily."