It is unanimously agreed that household debt is one of the major economic problems of Thailand. Non-performing loans (NPL) from household debt amount to 1.2 trillion baht according to the National Credit Bureau (NCB). If it includes Special Mentioned (SM) debt (31-90 days of default), the bad debt level would rise to 1.7 trillion baht, or about 12.3% of total household debt outstanding.
With such a high level of bad debt, banks may need to recapitalise, as the current loan loss reserve provision of 838 billion baht is insufficient. After deducting 343 billion baht in non-performing loans (NPLs) from business loans, the loan loss reserve falls short by 700 billion baht in covering household debt NPLs.
The reason why a capital raising requirement is not enforced is because the NPL loan classification standard of the Bank of Thailand (BoT) differs from that of the NCBs.
According to the BoT's loan classification, NPLs for household debt are only 175.8 billion baht, not 1.2 trillion baht. Why is the difference so much? Ask the BoT, not the author.
However, regardless of the BoT's classification, banks are aware the bad debt threat (NPL+SM) is 1.7 trillion baht and behave accordingly. They are not only becoming conservative in issuing new loans but recall as many loans as possible to minimise credit risk. Private credit shrunk 131 billion baht in Q3/2024 after the contraction of 47 billion baht in the quarter before. This cautious practice causes havoc on the economy.
This includes a 27% decline in both housing and automobile sales and rising NPLs. The latest news is that automobile sales fell 36% in October, the lowest in 54 months. It is obvious that the 145 billion baht cash handout in early October has not helped.
To stop the havoc and possibly revive economic growth, the government is pushing for a national household debt restructuring scheme. Some 1.31 trillion baht of household debts -- consisting of (1) housing debt, (2) automobile debt, and (3) SME debt -- is estimated to qualify for the scheme. The incentive for NPL debtors to join the scheme is three years of free interest payments. Since interest payments are forgiven for three years, all proceeds of loan payments during the first three years would go towards principal reductions.
However, it does not come without conditions. Participating debtors would have to strictly follow the minimum repayment requirement. The monthly payment rule is the payment of 50% of regular monthly installments for the first year; payment of 70% of regular monthly installments for the second year; and payment of 90% of regular monthly installments for the third year. Failure to do so means the debt restructuring agreement would be cancelled and no interest give away awarded.
Sound good? Not really. The big question is how debtors come up with cash for the 50% repayment in the first year, the 70% repayment for the second year, and for the 90% for the third year? Most of them barely make ends meet to match today's expenses and income. That is the very reason they become NPLs.
The essence of debt restructuring is to match debt repayment to debtor's cashflow -- the ability to pay. The 50%:70%;90% numbers are picked out of thin air, not based on an individual debtor's ability to pay. How will the government know that most NPL debtors can honour such a commitment?
Most debtors are likely to have a low or no ability to service debt. This inability to pay problem will cause the government's informal debt solving scheme to be a spectacular failure. Out of 10 million estimated informal debtors, about 1.5% joined the government-sponsored debt negotiation programme. The reason could be that 98.5% of debtors could not afford to service debt regardless of the negotiated outcome. Why bother to join?
This question comes up again under the fixed repayment rule of the proposed national debt restructuring scheme. More importantly, the question of "why bother to join?" is one for participating banks as well.
Banks are likely to be unhappy about the scheme as they are asked to shoulder 100% of the interest giveaway cost, which is estimated at 80 billion baht per year. For three years, the total cost would be 240 billion baht. On the surface, it appears the Financial Institution Development Fund (FIDF) would bear half of that cost through reduced fee contributions from 0.46% of the deposit base to 0.23% of the deposit base for three years. But in actuality, the FIDF does not forgive the contribution but only allows deferred payments. Banks would have to pay back the reduced fee in full (with interest) later on.
Even with a reduced FIDF fee contribution, banks' profit is estimated to be 15% less than interest giveaway cost. Therefore, shareholders might not approve banks participating in the scheme.
The interest giveaway cost might also be the reason why state-owned banks will not participate in the national debt restructuring scheme as it could lead to a violation of Article 157 of Wrongful Exercise of Duties by causing financial damages to the state.
Besides, banks already have a much better alternative to doing their own debt restructuring to their NPL debtors with more flexible conditions to suit both customers and themselves. Banks are experts in debt restructuring and have successfully performed 1.03 trillion baht of Trouble Debt Restructuring and 646 billion baht of Pre-emptive Debt Restructuring. The total restructured amount is 1.7 trillion baht so far and banks are doing more. Why bother participating in a national debt restructuring scheme?
Curious minds might want to know why banks have not restructured the remaining 1.31 trillion baht of NPLs? There could be two possible answers -- time and inability to pay.
Give banks more time and they will eventually get to that 1.31 trillion baht. Or it could be a waste of time to restructure this group of NPL debtors as debtors have no ability to pay back. Liquidating their assets makes more sense.
Another flaw of the national debt restructuring scheme is that it does not cover all loan types. The scheme only provides a partial solution, not a total one. It excludes 284 billion baht of personal loan NPLs and 69 billion baht of credit card NPLs. If a debtor defaults on excluded loans, creditors can still take legal action and ask the court to liquidate a debtor's assets.
I do not understand where the government gets the idea that banks will offer new loans after restructuring? It would never happen.
At present, 86.5% of household debt accounts are considered good and disciplined as debtors are paying on schedule despite an unfavourable economic environment. Only 13.5% of accounts become NPLs and SMs. Banks should appreciate paying customers and reward them with more loans. But that does not happen.
The government's proposed scheme helps only NPL debtors and ignores good debtors. If the government wants to see more new loans, it has to improve good debtors' ability to pay. Banks, while appreciating their financial discipline, fear that adding more debt to good debtors will exceed their repayment abilities.
Despite the government's noble intentions, the proposed scheme duplicates a bank's own debt restructuring scheme, with the added flaws of inflexible repayment rules and more costs for banks. It is better for the government and BoT to support and expedite a bank's ongoing restructuring efforts.
Better yet. A national household debt solving scheme for all household debtors, not just for NPL debtors, should be created. That is what the economy really needs, not duplicated actions.