Big Read – Household debts solution team set to propose ways to resolving the elephant in the room

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The rising household debt of Thailand has finally caught the attention of the government of 2014 coup leader Prayut Chan-ocha, and the incumbent Prime Minister has set up a committee headed by Deputy Prime Minister Supattanapong Punmeechaow.

Thailand’s household debt has risen to more than 90% of Thailand’s gross domestic product (GDP), the 11th highest in the world. As of end of Q1 2022, the latest data available, the household debt stood at around 89.2% down from 90% seen during the previous quarter.

The household debts stood at 14.65 trillion Baht and the end of March against 14.57 trillion seen at the end of 2021. The decline in terms of percentage there was a decline as the economy expanded from those seen during 2021.

The high household debt has created a problem of drop in consumption, a key component of the economic growth that has been stalling ever since the outbreak of the Covid-19 outbreak in 2020. The high household debt has kept people from spending money on buying white goods and other consumption items that helps keep the economy humming.

Household Debts as Percent of GDP

Realizing that the high household debt is going to be a major hurdle to any economic growth of the country, General Prayut in June appointed a committee headed by Supattanapong to look at ways to resolve this issue.

This committee is tasked with looking for ways to find effective solution to the household debt situation in all dimensions and every credit portfolio. The household debt problems continued to accelerate especially during the COVID-19 pandemic which further aggravates households to be affected until they cannot pay their debts and become a “Problem debtor” or a bad debt in the end.

Kiatnakin Phatra Bank Plc (KKP)’s research arm – KKP Research, came out to say that the rising household debt was because the lowest 20% of the population have an average monthly income of just 10,000 Baht, while the expenses per household stood at 12,000 Baht. This gap has prompted households to seek funding from resorting to borrowing to pay for their essential services.

40 million Accounts

A source from the financial institution has come out to say that the so called ‘Committee on Debt Resolution of the People’ is prepared to propose a solution for solving household debt to the Prime Minister in order to urgently issue guidelines to help each group of debtors because if it’s too late, it may cause a wide range of debtors to be unable to get out of the “debt trap” until it may affect their way of life or even the economy in the big picture.

The number of accounts that are there are close to 40 million in the system that needs some form of help to keep them away from being delinquent.

At present, it is found that the overall portfolio of debtors, including both in the system of the National Credit Bureau (Credit Bureau) and informal debt, ranges to a total of about 95.35 million accounts which consisted of receivables of commercial banks, receivables from non-bank financial service providers (nonbanks), savings cooperatives, agricultural cooperatives, and other cooperatives, and including debtors of the Student Loan Fund (SLF) and PICO Finance.

Out of these 95.35 million accounts, it can be divided into 79.24 million accounts receivable in the credit bureau system and more than 16 million accounts from the lenders mentioned above.

A breakdown of the 79.24 million accounts receivables, there are 69.4 million accounts receivable categorized as “normal accounts receivable”, which in this group is expected to be relegated in the future by about 20% or 15 million accounts.

Meanwhile, there are 1.736 million accounts with 31-90 days overdue, in other words, debt that needs special attention, while there were 8.085 million accounts overdue for more than 90 days.

However, if the 3 groups are included, the debtor who began to owe the payment and the debtor who is already in bad debt, these groups combined have 9.8 million accounts, and it is estimated that another 15 million accounts from the Student Loan Fund and PICO Finance that needs help are expected to flow from normal debt to debt that has difficulty repaying.

In conclusion, there are about 40 million accounts receivable in the system that need help.

However, if only looking at the problematic debtors in the credit bureau system, especially those that need special attention, that are starting to be overdue by 31 days but not more than 90 days, it was found that the number of the debtor has a tendency to increase continuously.

These debts are at a high risk of default on debt payments until eventually become bad debts.

Mortgage & Hire Purchase also in Bad Shape

The hire purchase loans segment, and the mortgage loans are also witnessing a gradual increase in the number of higher default or ‘special attention’ category.

In the hire-purchase, there are 413,445 accounts with outstanding debts, in that way, nearly 400,000 households may be subject to vehicle seizures in the near future.

Likewise, in ‘home mortgage’, it was found that the figure for unpaid debts or special attention groups that could lose their houses if they could not cope with the situation is 108,000 accounts.

The situation of debt problems since Covid-19 in many dimensions has continued to deteriorate. Therefore, it is necessary to urgently approach to fix and help the debtors.

Not only households, but if looking at small & medium sized enterprises (SME) who are legal entities in the credit bureau’s database, it is another group that has been highly affected by the rising interest rate cycle as most debts use floating interest.

As of the first quarter, there were more than 286,000 SMEs, or 7.9% of all loans were bad debt, while if including the NPL group and the defaulted group, these 2 SME groups have 11.5% of the troubled debt.

Measures to Solve All Minor Debt in the System

It was reported that each group of debtor assistance guidelines, the committee of Debt Resolution of the People has divided the basic assistance into 3 groups

  1. Normal debtors
  2. Debtors who begin to accrue
  3. Debtors who are already in bad debt

The help of restructuring debt would especially focus on those SME that are starting to feel the pain and are heading towards becoming bad debts.

In terms of retail borrowers be it in the form of credit card debt or personal loans, it is likely to fall in the category of monitoring loans that could not pay the full debt, only the minimum due each month.

There are almost 5 million credit card and personal loan receivables that should go to a debt clinic. The way to fix that is to let the debtors pay only the principal of 5% and extend the repayment for 10 years instead of a lawsuit.

Deputy Prime Minister Supattanapong said that these loans should be converted to long-term loans of 3-5 years with lower interest rates which is the same way Singapore has used and are charging as low as 8.5% per year in interest rates instead of the current 16-33% charged by the creditors.

As for debts in the hire/purchase segment, there are as many as 400,000 vehicles that are past due for 2 or more installments. A lot of the impact has been due to the outbreak of Covid-19 and the economic impact it has had on the economy. The aim is to start to restructure these loans before they head for a default on the 3rd consecutive installment.

As for the hire-purchase debtor who currently uses a vehicle for an occupation such as taxis and tractors, stand at 600,000 vehicles that have been confiscated, so they should go for mediation, in that way, they could bring the vehicles back to continue their career.

Mortgage loans are also in trouble and Deputy Prime Minister Supattanapong suggested that they should go for the moratorium, but interest for moratorium must be fair and not aggravate the people, and also must not be more expensive than the default interest rate.

The debtor of 150,000 houses who cannot pay the installment due to Covid-19, the financial institutions should resolve their debt instead of selling it to asset management company (AMC) and making it worse than the former one that said they had to pay the debt for 30 years, now, they may be forced to pay that same debt within 3 years.

The BoT Should be an Intermediary to Help Debtors

Sources say that there was a proposal from the Debt Resolving Committee that problem debtors, especially the code 21 group in the credit bureau systems, should use the mechanism of a proactive debt clinic by allowing officers from the Bank of Thailand (BoT) to act as intermediaries or being a mediator to create the balance between the creditors and debtors during difficult times.

Like in 1997, there was a debt restructuring committee that took care of debtors until 2024, after which they may adjust the repayment schedule again according to the guidelines of the Bank of Thailand which suggested the method of debt repayment in the low front and high back, unlike nowadays where the debtors must be the one reaching out to the creditors.

However, apart from being an intermediary in debt restructuring negotiations, the BoT must also set a target for each bank to solve this group of debt of at least 1 million out of 2.1 million debtors, as well as set targets for each financial institution to provide more assistance to debtors.

As for the group of code 30, the debtors must open for negotiation through the BoT platform first in order to understand the negotiation problems between the debtor and the bank in order to prevent litigation.

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