The government’s SME soft loan program can still be retuned to save the sector

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It has been over a year since the start of the Covid-19 pandemic. Measures such as lockdowns and mask mandates have been imposed to curb the spread of the virus around the world. These measures, understandably so, induced recessions, sending the global economy into a downward spiral, prompting central banks to adopt unconventional monetary policies hoping to restrain the financial mayhem. These policies range from buying bonds in the financial market (aka QE program) to handing out stimulus checks to the unemployed. 

For Thailand, its economy depends largely on small and medium sized businesses (SMEs), with their contributions sitting at around 45 percent of the country’s total GDP. Nevertheless, SMEs were disproportionately affected by the public health mandate, especially lockdowns. One reason was that most SMEs were locally oriented and digital transformation might not be conducive. Per the 2019 survey, only 8.1 percent of the total enterprises provided sales and services online. Predictably, when the country went into lockdown, many SMEs were virtually forced out of businesses.

It is therefore imperative that the government assists SMEs to maintain their operations, financial footings, and cash flows for the sake of the country’s economic recovery. One of the strategy that the Thai government chose to pursue is to enable soft loans to SMEs.

“Soft loans,” as its name suggests, denotes a loan with unusually favorable terms (thereby “soft”) to borrowers, such as low interest rates, deferred repayments, and income-contingent repayment. 

In April 2020, the government enacted the Emergency Decree on Providing Financial Assistance to SMEs Affected by Covid-19 B.E. 2563 (“soft loans decree”). The decree, in effect, channels capital to eligible SMEs through a two-layered approach: the BOT first grants loans to commercial banks, and the banks will in turn funnel these sums to SMEs.

The decree allocates 500 billion baht for the program and requires that the interest rate charged on SMEs is capped at 2 percent per annum. Nevertheless, since the program’s inception, less than 30% of the available funds (~138,200 million baht) has been granted. This is surprising in light of the SMEs’ dire need for cash to stay afloat and favorably low interest rates SMEs cannot get elsewhere in the market. 

In response to this, the government enacted another piece of legislation earlier this year (the Emergency Decree on Providing Assistance and Rehabilitation to SMEs Affected by Covid-19 B.E. 2564 (“2564 decree”)), purportedly to address the former’s shortcomings. Previously, the law allowed only SMEs who have had outstanding loans with commercial banks to be eligible for soft loans. This requirement effectively excluded SMEs whose businesses were previously taking off and did not require finances before the pandemic hit. The 2564 decree lifts this restriction. Nonetheless, we saw just above 16% of the total facilities granted under this new scheme, with 43.7% of the granted amount going to larger corporations as opposed to SMEs. 

The performance of the whole scheme runs counter to the government’s plan: Providing easy money to SMEs and driving the economy upward.

So why after two separate attempts has the government still failed to put money where it is needed most?

The possible reasons are discussed below.

  1. The two-layered mechanism and the banks’ risk aversion

Under the soft loans scheme, commercial banks do not serve merely as a financial conduit that connects between the BOT and SMEs. Rather, because of the two-layered mechanism, default risk is shifted to commercial banks. Given that banks are generally conservative, they become extremely risk-averse during the economic downturn.

According to a person familiar with the matter, banks impose eligibility requirements on their SMEs clients that are unattainable. For example, they require SMEs to prove that they have sufficient cash flow and profitability to repay the loans. However, most SMEs whose businesses require physical venues to operate fail to meet this requirement, especially since the pandemic has been with Thailand for more than a year. This led to the huge share of facilities granted to more well-established corporations who may already have stockpiled cash well in advance. 

Also, some of the SMEs needing funds are mom-and-pop shops, local food stores, and food trucks who do not have proper accounting readily available. This unavailability complicates the SMEs’ ability to prove their financial eligibility leading to their loan requests being turned down.

The government should have created proper incentives for banks to provide loans to SMEs, such as shouldering bad debts in place of commercial banks. Instead, they opted to expand the scope of eligible borrowers, which clearly does not address the problem underpinning banks’ concerns. As a result, the government’s second attempt in 2021 also failed to live up to its purposes.

  1. The BOT’s perceived integrity

The BOT perceives itself to be a “market regulator,” according to an official familiar with the matter. What this means is that the BOT would strictly limit its roles just to create platforms and enabling factors rather than exerting itself into directing the market. Perhaps, this is because the BOT operates like a civil servant who is afraid of getting blamed for their actions, and therefore chooses to engage passively. 

The above holds true for the BOT’s roles in the soft loan scheme. Under both emergency decrees, the BOT does not have the power to direct commercial banks to grant loans. Rather, it is up to the banks’ discretion. This coupled with their risk aversiveness, the scheme fails miserably. Perhaps, it is time for the BOT to take a more proactive approach and let go of its perceived integrity. Afterall, unusual time requires unusual measures.

So now that the issues have been discussed, let’s talk about what the government can do to properly address these shortcomings. There are several immediate responses the government can implement now. One, the government could collaborate among themselves to create proper incentives for commercial banks under the scheme. It should not be the sole responsibility of the BOT. The BOT can perhaps join forces with the Revenue Department to introduce tax deductions or credits for commercial banks who grant loans to pandemic-stricken businesses. Additionally, the government may consider setting up government-owned distressed loan purchase vehicles. These vehicles could then act to sweep up non-performing loans from banks under the soft loans scheme which will ease commercial banks’ concerns in hope of reducing their risk aversion.

It is important that the government act and act quickly. SMEs are vital to the country’s economic recovery. It is especially alarming that more developed countries are heading out of the pandemic. The Federal Reserve of the United States is signaling an earlier-than-expected policy interest rate increase to combat their internal inflation as a result of the overly heated economy. According to the Wallstreet Journal, the US’s economy accounts for more than a quarter of the global GDP. The rapid economic recovery of the US is exerting pressure on the emerging economies, sending their commodities prices higher. This will lead central banks in emerging markets to curb the inflation by increasing their interest rates while their economy is not yet fully remedied. This interest rate increase could risk stifling the economic recovery. If Thailand, as one of the developing economies, cannot emerge out of this pandemic-induced recession in time, the consequences could be dire.

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