BoT has issued measures to tackle the problem of household debt, including: 1) responsible lending, 2) persistent debt, 3) risk-based pricing and 4) debt service ratio. We expect these to be negative to interest income but positive to asset quality. For banks, the impact is expected to be insignificant, with only small impact on non-banks. Our assessment suggests AEONTS will be impacted the most.
Household debt measures. On 21/7/23, the BoT issued measures to tackle household debt problems in the L-T. These are detailed below.
1) Responsible Lending (RL): Effective January 2024, financial institutions (banks and non-banks) will be required to have an end-to-end lending process ensuring responsibility and fairness. This includes: 1) no excessive promotional campaigns that encourage customers to borrow beyond their means; 2) consideration of affordability, needs and circumstances for each client; and 3) quality and adequate aid for debtors in distress for appropriate, timely and sufficient assistance.
2) Persistent Debt (PD): The BoT defines PD as when interest paid by debtors over a period of five years has exceeded the principal. Effective from April 2024, the BoT will apply PD measures to revolving personal loans for debtors with a monthly income of not over Bt20,000 for banks (including non-banks under consolidated supervision) and Bt10,000 for non-banks. Debtors with PD will be given the option of converting their loans into term loans with a reduced interest rate not exceeding 15% (vs. the 25% ceiling rate) to allow them to complete repayment in five years.
3) Risk-based Pricing (RBP): Creditors will be allowed to charge interest based on client risk profile. Financial institutions participating in this initiative will need to apply for testing in the sandbox environment with the BoT before implementing. The sandbox will be opened in the middle of 2024.
4) Debt Service Ratio (DSR): This will involve setting DSR as a part of the credit policy to ensure that borrowers have sufficient income to repay debt. This is expected to be implemented in 2025.
Negative to interest income but positive to asset quality. We expect these measures to be negative to interest income, as the PD measures will pull interest income down for those joining the program, and a slowdown in loan growth as repayment becomes more rapid. At the same time, these measures should lead to better asset quality in the long term, helping ease credit cost.
Insignificant impact on banks, small impact on non-banks. These measures will have an insignificant impact on banks as they have little exposure to revolving personal loans. AEONTS has the highest exposure to personal loans (part of which are revolving) at 47% and thus is expected to be impacted the most by the PD measure at ~10% based on our preliminary assessment. KTC has the second highest exposure to personal loans of 31%. As a subsidiary of KTB, KTC is subjected to the PD measure for debtors with monthly income not exceeding Bt20,000 rather than Bt10,000 as for other non-banks. If all eligible customers take advantage of the PD measure, KTC estimates this will slice ~Bt18mn/month off interest income (implying ~7% of its personal loans would fall under the PD measures), with after-tax impact equivalent to 2% of 2023F earnings. MTC has an 11% exposure to personal loans, likely to be a higher proportion of PD than peers. We preliminarily assess an impact by this measure on MTC’s earnings of 3%. SAWAD also has a 5% exposure to personal loans, most of which are extended via SCAP (its 72% owned subsidiary) whose target group has a high monthly income (> Bt20,000). We estimate only 1% impact by this measure on SAWAD’s earnings. Note that the negative impact on interest income would be offset by a positive impact on asset quality, eventually giving a neutral net impact.
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