While politicians are fighting for power to rule this country, the economy may unknowingly be entering a debt crisis. There was a piece of news a couple of weeks ago which passed without much notice amid sizzling political stories. It was news of the automobile loan default problem.
The National Credit Bureau reported that automobile loan default rates were quickly rising and as much as 1 million cars could be repossessed within four months.
Out of the 2.60 trillion baht auto loan portfolio, those in 1-3 months' default are worth 190 billion baht and over three months default, 180 billion baht. Therefore, as of Q1/2023, the total delinquency rate is 14.2%.
High, yes. But what is the big deal? The "big deal" is that the Credit Bureau projects the delinquency rate will triple within one quarter leading to the repossession of a million automobiles.
If bad loan problems are only limited to car loans, that would be one story. But I am afraid that the entire household debt of 15.1 trillion baht, equivalent to 86.9% of GDP, is being defaulted at a dangerously high rate as well.
Experience from the Tom Yum Kung crisis of 1997 showed that car loan portfolios had the lowest default rate as for Thais, automobiles are an essential tool for earning a living.
Just think of the merchants, farmers and small business owners who would have no transport to get their products to markets and customers.
In Thailand, pickup trucks dominate 40% of the total personal car market. Based on such statistics, out of the 1 million automobiles to be repossessed within four months, 400,000 of them will be pickup trucks, which means as many merchants, farmers, and SMEs could risk going into bankruptcy.
Thailand does not only have a high level of household debt, but the structure of the debt is the worst in the world. In most countries, 60% to 90% of household debt is comprised of housing loans which are long-term in nature. And, most importantly, fully collateralised.
Only 4.7 trillion baht of the 15.1 trillion baht of Thai household debt comes from housing loans, or about 30%. Taking the medium-term auto loans of 2.6 trillion baht out, 7.8 trillion baht of household debt, or about half of the portfolio, is short-term and not collateralised.
If the auto loan default rate is as high as 40%, I would not be surprised to see the "actual" short-term loan default rate exceed 50%. Unfortunately, one cannot see the "actual" loan default problems as commercial banks hide their figures through loan repayment arrangements so as to avoid providing necessary loan loss reserves.
According to Bank of Thailand data, the commercial bank non-performing loan ratio is merely 2.8%, but the National Credit Bureau reports the non-performing auto loan default rate to be 14.2%. Apart from automobile debtors, all debtors in Thailand must have a clean credit history. Do these two organisations live in different parallel universes?
One might think the National Credit Bureau only has a fraction of credit data and their reports might not represent the big picture. Out of the 15.1 trillion baht household debt, the National Credit Bureau has 13 trillion baht of credit data.
They do not have the data of certain specialised government banks. No point arguing about data accuracy as the 14.2% default rate, moving up to 40% default rate for auto loans, is more than enough (to me and to all sensible people) to find dead serious. The question is, how did the economy get to this point?
The root of the problem is that Thais have too much debt and a low debt servicing ability because of the negative income-expense gap. That is a fundamental problem and I have suggested a solution by setting up a National Debt Relief Agency. Readers can find my old articles on that. But the culprit now is the effect of debt restructuring from the Covid era.
Before Covid, a typical Thai borrowed money to buy a car with a monthly payment of 10,000 baht. The credit term is 60 months. Then Covid hit the economy and that debtor's income was severely affected. Creditors generously halved monthly payments to 5,000 baht for two consecutive years, until December 2022.
Case I. The credit term is kept at 60 months. But the monthly payment would jump from 5,000 baht to 15,000 baht to make up for the delayed payment starting January 2023. With a tripled payment burden, large numbers of debtors default. Hence, the 14.2% default rate in Q1/2023.
Case II. The credit term is extended by 24 months to 84 months. This is not preferred by creditors as the loan to collateral value ratio would be greatly reduced towards the end of the contract.
Under this scenario, starting January 2023, monthly payments are suddenly doubled and debtors find that they have a hard time servicing restored full monthly payments. However, as I say, cars are essential. They would try their best to keep their cars as long as possible with a method called "payment juggling".
To delay car repossession, they make payments every other month. By law, banks/leasing companies would repossess cars after three months of defaults. Smart debtors would pay the first month, skip the second month, pay the third month's payment, skip the fourth month, pay the fifth month's payment, and stop making payments after that. Under this payment management scheme, a debtor's car would be repossessed in the eighth month.
The National Credit Bureau is able to project the rising default rate because debtors are doing "payment juggling". According to their data, about a million automobile debtors are doing just that.
An increased monthly payment burden arising from debt restructuring from the Covid era would likely be applied to all types of household debt. Housing loans would be least affected because of 20-30 year loan contracts. But personal loans with a two-to-three-year repayment period would be greatly affected. The impact on the economy would be as follows.
First, debtors would have to reduce consumption to prepare funds for increased repayments. Personal consumption accounts for 55% of GDP.
If consumption is cut by 10%, the entire economy would contract by 2.75%. One can pretty much forget about positive GDP growth for 2023.
Second, merchants, farmers, and small business owners without pickup trucks to run normal businesses would have much reduced sales. That would send a big shock wave of further reduction in income and spending to the economy.
Third, the banking system could collapse. Taking only non-housing, non-auto household debt of 7.8 trillion baht, if merely 20% of the outstanding debt (1.56 trillion baht) has to be cut, the current level of loan loss reserves could cover only half of that amount.
The other half would come out of the bank's capital fund. Therefore, a system-wide bank capital increase to maintain legal capital requirements, no different from during the Tom Yum Kung crisis, would be required.
This is a life-and-death situation challenging the economy. Politicians must stop fighting -- for the sake of 70 million Thais.
Chartchai Parasuk, PhD, is a freelance economist.
