The banking sector in Thailand is bracing for a challenging year as bad loans are expected to rise significantly. Analysts predict that the deterioration in asset quality will continue, driven by increasing personal loan and credit card debt. The new government’s efforts to lower lending rates may provide some relief to borrowers, but it also poses risks to banks’ profitability. With non-performing loans (NPLs) on the rise, banks are under pressure to manage their balance sheets and maintain financial stability. This article explores the factors contributing to the surge in bad loans and the potential impact on the banking sector.
Rising Non-Performing Loans
The increase in non-performing loans is a major concern for the banking sector. According to data from the Bank of Thailand, the total NPLs in the second quarter of 2024 reached 112 billion baht, up from 109 billion baht in the previous quarter and 101 billion baht in the same period last year. This rise is primarily driven by consumer retail loans and loans in the wholesale and retail trade sectors. The economic recovery has been uneven, leading to difficulties for small and medium-sized enterprises (SMEs) and individual borrowers in servicing their debts.
Analysts from CGS International Securities (Thailand) highlight that the increase in relapsed or re-entry NPLs, which totaled 28 billion baht, is a significant factor. These loans were restructured during the pandemic but have not been serviced adequately this year. The ongoing economic challenges have made it difficult for borrowers to meet their repayment obligations, leading to a rise in bad loans. This trend is expected to continue, putting further pressure on banks’ asset quality.
The manufacturing and service sectors have shown relatively stable NPL ratios, but the overall increase in bad loans indicates a broader issue within the economy. The banking sector must navigate these challenges carefully to avoid further deterioration in asset quality. Effective management of NPLs is crucial to maintaining financial stability and ensuring the long-term health of the banking sector.
Impact of Government Policies
The new government’s policies aimed at lowering lending rates are expected to have mixed effects on the banking sector. On one hand, reducing the fee contribution to the Financial Institutions Development Fund from 0.46% to 0.23% of total deposits will lower costs for banks. This move is intended to help borrowers by making loans more affordable. However, it also poses risks to banks’ net interest margins, as lending rates are benchmarked against policy rates.
Lower lending rates could lead to a decrease in banks’ profitability, particularly for loans with floating interest rates such as corporate, SME, and housing loans. Fixed-rate loans, including credit card, auto, and unsecured personal loans, may also be affected. The reduction in interest income could impact banks’ ability to manage their balance sheets and maintain adequate capital levels.
Analysts from KGI Securities (Thailand) note that while hire-purchase loans have shown signs of improvement, there are still risks associated with mortgages, credit cards, and personal loans. The increase in new NPL inflows for four consecutive quarters highlights the ongoing challenges in managing bad loans. To stabilize NPL ratios, banks are expected to raise credit costs in the second half of the year, which could further impact their profitability.
Strategies for Managing Bad Loans
To address the rising bad loans, banks are implementing various strategies to manage their balance sheets and mitigate risks. One approach is to write off and sell NPLs to external distressed asset management companies. This helps banks clean up their balance sheets and reduce the burden of bad loans. However, this strategy also involves costs and may not fully address the underlying issues affecting asset quality.
Another strategy is to increase credit costs to cover potential losses from bad loans. By setting aside higher provisions for loan losses, banks can strengthen their financial resilience and prepare for potential defaults. This approach, while necessary, can impact profitability and limit the funds available for lending and investment.
Banks are also focusing on improving their risk management practices to prevent the accumulation of bad loans. This includes stricter credit assessments, enhanced monitoring of loan performance, and proactive engagement with borrowers facing financial difficulties. By identifying potential risks early and taking corrective actions, banks can reduce the likelihood of loans becoming non-performing.
In conclusion, the banking sector in Thailand is facing significant challenges due to the rise in bad loans. The increase in NPLs, driven by consumer retail loans and economic uncertainties, poses risks to banks’ asset quality and profitability. While government policies aimed at lowering lending rates may provide some relief, they also present challenges for banks’ financial performance. Effective management of bad loans and proactive risk management strategies are crucial for maintaining financial stability and ensuring the long-term health of the banking sector.
