Is the Thai government’s plan to buy household bad debt a good idea?

Finance Minister Pichai Chunhavajira has flagged the danger to Thailand’s economy from the high household debt, and is prioritising government initiatives to deal with the long-standing problem.

Pichai, who is also a deputy prime minister, has said that the government needs to address the issue of small borrowers first, as Thailand is currently facing an economic crisis.

This crisis is different from that of 1997, when predominantly large businesses were affected. By targeting bad debts below 100,000 baht, the government aims to assist the majority of people in the system, as the cost of resolving these debts will be relatively low.

It could help reduce the problem of informal lending and also lower household debt levels, thereby increasing purchasing power to stimulate economic recovery, he believes.

Debt purchase initiative

The government does not intend to purchase the entire 1.22 trillion baht bad debt but will focus specifically on debts below 100,000 baht, typically overdue for more than one year.

Most of these debts are personal loans or consumer loans of limited amounts, according to Pichai.

Around 3.5 million people would benefit from this initiative, representing about 65% of those with bad debts.

The total debt in this category amounts to around 123 billion baht, accounting for about 10% of non-performing loans (NPLs).

The government aims to minimize expenditures by utilizing unspent funds from the "You Fight, We Help" program, which is managed by the Bank of Thailand.

Around 20-30 billion baht are available each year from the Financial Institutions Development Fund. The government plans to buy these debts from banks at a price of 1 per cent of the bad debt value, which is feasible since financial institutions have already made provisions for these bad debts.

In the event of a successful buyback, these debts will be managed by companies specializing in debt management, either newly established or existing ones.

The objective is to allow these individuals to repay their debts at cost plus management fees.

The government will not aim for any profit from this initiative. These borrowers will still be recorded in the credit bureau, but efforts may be made to expedite their clearance from its records.

The Ministry of Finance will establish mechanisms to enable individuals with credit issues to access new funds, such as loans from the Government Savings Bank of 10,000 to 20,000 baht or from virtual banks and other private companies that do not strictly check credit bureau records.

Although the interest rates may be higher than average, they remain lower than those from informal lenders, which can go up to 100%.

Addressing concerns

There are concerns that the debt purchase initiative might foster bad habits among borrowers.

The government has weighed the pros and cons and views this group as a means to stimulate the economy. “We are open to alternative solutions from those who may have better proposals,” Pichai added.

Many critics are skeptical of Pichai's strategy, which is seen as a brainchild of former prime minister Thaksin Shinawatra, the father of current Prime Minister Paetongtarn.

Critics view this initiative as a populist policy aimed at boosting the popularity of the ruling Pheu Thai Party.

Some even question why Thaksin and his associates do not use their personal funds for this initiative if it is such a good idea.

Sirikanya Tansakun, deputy leader of the People’s Party, raised concerns about the source of funding, suggesting that it could exceed the capacity of the Asset Management Companies currently operating in the market.

Sanan Angubolkul, chairman of the Thai Chamber of Commerce, expressed cautious optimism regarding the debt-buying initiative.

He acknowledged that it could help individuals suffering from financial burdens, but stressed that the government must target those who are affected by economic downturns rather than those who have overspent due to personal behavior.

He also suggested that the government needed to assure the public that this initiative would be about debt management, not debt forgiveness, to mitigate potential moral hazard issues.

Support from the National Credit Bureau

The chief executive officer of the National Credit Bureau Co, Surapol Opasatien, believes that it is feasible to purchase bad debt while minimizing the impact on moral hazard.

He proposes that the government create a new type of Asset Management Company (AMC) specifically authorized for debt purchasing and providing new loans.

The existing AMCs are limited to buying bad debt from financial institutions and managing distressed assets, which they later sell in the market.

Some AMCs are financed by their parent commercial banks, while others issue securitized bonds to raise funds and generate profits from selling assets such as houses.

To effectively clear underground debt, AMC’s lending capability is essential, said Surapol. He anticipates the cost of purchasing these bad debts could be low, estimated at around 5-7 per cent of the debt value.

The moral hazard factor could be minimized by focusing on specific debts incurred during the COVID-19 pandemic, with provisions that debtors may not be allowed to take new loans immediately.

What the bad debts data reveal

As of January, outstanding non-performing loans (NPLs)—defined as loans overdue for 90 days or more—amounted to 1.22 trillion baht, covering approximately 9.6 million accounts.

This figure represents 9 per cent of total household debt, which stands at 13.6 trillion baht, according to data from the National Credit Bureau.

Among these bad debts, those with amounts below 100,000 baht account for about 65% of the debtors. This group collectively holds bad debts totaling 123 billion baht, encompassing nearly 4.7 million accounts.

A detailed look at the NPLs reveals that personal loans are the most significant category, totaling 284.1 billion baht, followed by auto loans at 267.2 billion baht and housing loans at 232.9 billion baht.

Other notable bad debts include commercial loans totalling 80.9 billion baht, credit card debt at 69.1 billion baht, and loans for agriculture at 39.8 billion baht.

While individuals in developed countries often carry debt due to mortgages, Thai borrowers tend to accumulate debt for consumption purposes.

This pattern indicates greater vulnerability among Thai citizens, particularly due to lower income levels.

Thailand vs Malaysia

Many economists attribute the challenges of addressing household debt primarily to stagnant income levels, which are largely a result of persistent slow economic growth.

The Bank of Thailand has pointed out that a significant portion of Thai debtors borrow money primarily for immediate consumption.

In fact, housing loans constitute only around 35 per cent of household debt, while non-productive loans make up as much as around 70 per cent. This contrasts sharply with Malaysia, where approximately 70 per cent of loans are taken out for future investments, including mortgages that represent about 60 per cent of total household debt.

In Malaysia, consumption loans account for only 30 per cent.

As of the end of last year, household debt in Malaysia stood at 84 per cent of GDP, while Thailand's household debt was slightly higher at 88 per cent of GDP.

This shows that while both countries face high levels of household debt, the composition and purpose of the debt are substantially different.

Economic growth and structural issues

Thailand's economic growth has been relatively low, hovering around 2-3 per cent for many years, which has caused it to lag behind its ASEAN peers.

The country is grappling with both structural issues and ongoing political crises that contribute to political instability.

Additionally, Thailand is transitioning into an aging society, with a rapidly increasing elderly population.

The legacy of previous coups deterred foreign investment and affected economic cooperation from developed countries, including the European Union and the United States.

Thai industries are losing their competitiveness in export markets, particularly due to the influx of inexpensive Chinese products that are undermining many small and medium-sized enterprises.

Additionally, tariffs imposed by the US can have both positive and negative impacts on the overall economy.

Finance Minister Pichai and the government are currently preoccupied with trade negotiations with the United States, which may limit their capacity to focus on the pressing issue of household debt.

Many economists have long recognized that addressing the issue of household debt is, at best, a temporary solution while waiting for the economy to grow at a faster pace.

This highlights the need for a more sustainable economic strategy that not only alleviates debt in the short term but also fosters long-term growth and financial stability for households.