As our economy grows, we have become influenced more and more by Western values and ways of thinking. This has inevitably led to various changes in our behaviour and day-to-day life. One such example is the recent rapid expansion in credit card businesses which could be potentially harmful to Thai society, if not supervised appropriately. If people earned enough income to pay their own bills, or if everyone had adequate financial literacy to properly understand and assess his or her own ability to pay and service debt, we would have nothing to worry about.
Grass roots debt
The point is we are not talking about the educated or the financially literate group of our society. We are talking about the grass root level. It
appears that this group has become the target of non-bank credit card companies, most of which are foreign–owned. They have targeted those at very low-income levels–people earning as little as 6,000 baht per month.
With their own disposable incomes barely enough to pay for daily living expenses, credit cards provide them with an extra source of funds and the ability to satisfy their pent-up demand for many items which would otherwise not be within their reach.
However, after a few big ticket purchases, situations often arise where their income is insufficient to cover upcoming installments. This problem is compounded by very tough debt collection procedures for borrowers who are unable to pay.
Finally their purchased merchandises would be repossessed and their high debt levels sometimes lead to job losses.
Bank of Thailand reins in plastic...
Historically, the Bank of Thailand had no authority to regulate these non-bank credit-card companies, due to their status as non-deposit-taking institutions. However, as we continued to witness the potential danger of these companies’ behavior, the Bank of Thailand decided to step in.
After requesting and receiving the Government endorsement on this course of action, the Bank of Thailand is now entrusted with the oversight role of all credit card providers, including non-deposit-taking companies. Since November 2002, the Bank of Thailand has issued circulars to regulate the provision of credit card services. A minimum income requirement for cardholders has been set at 15,000 baht, and a cap on the maximum interest rate charged set at 18% per annum. This initial action has
somewhat slowed the expansion of credit card businesses; however, further measures were needed.
In April 2004, the Bank of Thailand revised regulations to raise the minimum amount of monthly payments from no less than 5% to 10% of outstanding debt, and shorten the term for debt payment from 20 to 10 months. The increase in the minimum monthly payment to 10% aims to prevent cardholders from spending more than their ability to repay, as well as help pace their purchasing of items in order to prevent an excessive debt repayment burden in the future.
After the second regulatory revision, the annual growth rate of credit outstanding for installments of credit cards issued by commercial banks declined from 40% to 17 %, a rate which may be less likely to create problems.
Personal loan sharks bare their teeth
With more stringent supervision in the credit card business by the Bank of Thailand, a new phenomenon has arisen: growth in the personal loan business, particularly since 2003. This has proliferated in various types of institutions, including commercial banks - especially foreign-owned
commercial banks, and existing credit card companies.
In addition, new foreign-owned non-bank companies, registered as limited companies and not as financial institutions, can undertake the
business of lending to individuals, without requiring approval from the Bank of Thailand, as they are not deposit-taking institutions.
These companies have opened branches in many major provinces
throughout the country. In many cases, these businesses rent a shop-house as an office to provide personal loans to low-income borrowers, for example, at around 4,000 baht per month.
While Thai commercial banks charged interest on personal loans at the rate between 12 - 24% p.a., foreign banks charged between 12 to 46% per annum, and foreign-owned non-bank companies charged an even higher rate of 12-58% per annum.
Charges by non-bank companies sometimes seem misleading as they split the monthly interest charge into two parts: one part called interest rate,
and the remaining part called fee. But their fee calculations are done in the same way as interest rate charges. For example, one non-bank company charges an interest of 0.99% per month plus a
service fee of 3.98% per month.
Many borrowers, who do not fully understand this financial technique, misunderstand that they have to pay a one-time fee of 3.99% and an interest rate of 0.99% each month, which seems quite reasonable. In reality, however, such a company charges an effective rate of up to 58% per annum.
Only when they begin their debt payment, would they realize that out of
a total loan of 10,000 baht, and a monthly installment of 600 baht every month, they would need up to eight years to repay the aggregate amount of debt!
The Bank of Thailand has also sought for the expansion of our regulatory framework to oversee the personal loan business. The Ministry of Finance has issued a notification giving authority to the Bank of Thailand on July 2005 to set the ceiling on interest rates at 28% per annum. Every enterprise now needs to register for a license and bring its ceiling rate down to no more than 28% per annum.
Likewise, the Bank of Thailand has urged these licensed operators to clearly and transparently disclose the computation of their interest rate calculation in order to prevent confusion among consumers. Currently, we are monitoring closely the situation of consumer loans. If any further
problems arise, the Bank of Thailand will not hesitate to take appropriate action.
The Western way of “pay now, save later”
The proliferation of credit card and personal loan businesses have provided greater opportunity for people to spend more on necessary items before they start to save. This way of life would do no harm if individuals exercised self-control on their spending and were able to evaluate their capability to meet the expense of each installment.
However, the effect of this easier means of payment is more likely to
stimulate people to buy at the wrong time. Not surprisingly, the “save now, pay later” culture has been reversed. In the United States, the “pay now, save later” culture has worked for the US economy, as people have better job opportunities.
We should not promote such culture in our economy because generally people, especially those in the provinces, cannot easily earn extra income to pay for their increased debt burdens. This is why I try to tell people that we should not adopt the Western way of “pay now, save later” mentality too rapidly, or allow this mentality to become a norm in our society; otherwise a host of problems would arise.
Credit card and personal loan business still have benefits for consumers in terms of their convenience, particularly for those customers who have financial literacy and self-control. However, there is a need to control and supervise this business to prevent retail customers from overspending and, at the same time, prevent the operators from overcharging interest rates and fees.