Financial sector is bracing for impact after the Ministry of Finance proposes a suspension of interest and reduced principal payments on some bad debts, aiming to tackle household debt in Thailand that surges to a record high of around 90% to GDP.
The big idea from the Ministry of Finance targets borrowers who have overdue debt between one and 12 months. Those eligible to the plan will receive a three-year interest suspension and a 50% reduction of principal payments.
Kasikorn Securities commented that this proposal is seen as negative for banks and financial institutions, as execution could potentially impact the Internal Rate of Return (IRR) of retail loan portfolios and affect loan yields, similar to the debt moratorium during the COVID-19 period. However, the impact this time might be more significant due to the extended 3-year period.
Long-term debt relief and reduced payment schedules are expected to result in sustained high NPL formation even after measures are concluded. Although a reduction of 23bps in the Financial Institutions Development Fund (FIDF) fee might provide further relief at a certain level, it is unlikely to offset the negative impact on Net Interest Margin (NIM).
Nevertheless, further details and responses from the Banking Association and the Bank of Thailand will need to be awaited to determine the next steps. Beyond this issue, the banking sector already has a negative outlook due to the anticipated weakening profit trends from 4Q24 onwards.
