This is the second article, Managing Household Debt, of the Changing Thailand series.
As explained earlier, Thailand has the highest non-mortgage household debt per GDP in the world. Household debt in most countries is dominated by mortgage debt which is not only of a long-term nature but is also collateralised by housing.
Some economists regard mortgage debt as productive debt because houses could be a good investment. According to the Bank of Thailand, only 30.9% of Thai household debt comprises mortgage debt while about 12% is automobile debt. So, 57.1% of our household debt is made up of uncollateralised debt such as credit cards and personal loans.
The total amount of uncollateralised household debt in Q4/2022 was 8.6 trillion baht, or 216% of the entire banking system's capital funds and loan loss reserves.
If 20% of uncollateralised household debt defaults and needs to be written off, the banking system will be required to raise capital. If 30% of uncollateralised household debt defaults and needs to be written off, the banking system will be ordered to stop taking in deposits.
If 46% of uncollateralised household debt defaults and needs to be written off, the banking system will be in the same position as Credit Suisse. Things are that precarious.
From a study by the Puey Ungphakorn Institute for Economic Research, a research arm of the Bank of Thailand, we can estimate there are some 25 million debtors (about half of the Thai adult population) with an average household debt of 527,000 baht per debtor. Most importantly, 20% of such debtors (as of Q3/2022) already have repayment problems.
Managing household debt is not just necessary for saving the banking system, but also necessary to relieve millions of debtors from choking on debt repayments.
Is it possible to manage these household debt problems without destroying financial discipline, increasing moral hazard, and asking for public financial assistance? The answer is difficult but not impossible. Here is how to do it.
There are three steps to this colossal debt management scheme which would involve a minimum of 5 million debtors. First, set up an organisation called the "National Debt Relief Agency (NDRA)".
Second, all banks and non-banks would transfer their uncollateralised household debts, with debtors' consent, to the NDRA.
Both good and non-performing debts can be transferred. Debts which are not transferred would be left with the original lenders at the original loan conditions.
Third, debtors of the transferred debts will cease to deal with the original lenders and deal with the NDRA directly under agreed terms and conditions.
The funding for the NDRA would come from original lenders by exchanging NDRA's debentures for loans. The operating expenses of the NDRA, on principle, would be the responsibility of the lenders. No public financial assistance in any form is required.
The role of the NDRA is to (1) consolidate all debts of an individual debtor into a single NDRA account for ease of management and (2) extend the maturity of various debts to five years and apply only one interest rate of 6% to reduce monthly repayment obligations.
The heart of this scheme is extension of debt maturity and interest rate reduction. As shown in the table, monthly repayments for uncollateralised debts, after transfer to the NDRA, would be reduced from 6,000-9,000 baht per month to 2,000 baht per month. Please notice that there is no haircut on the principal nor concessional interest rates.
On average, Thai debtors have uncollateralised loans amounting to 300,000 baht per person which means, after transferring their debts to the NDRA, their monthly payments would be reduced to less than 6,000 baht per month from the usual 18-17,000 baht per month. Good idea?
Undoubtedly, the scheme is good for debtors but what would persuade creditors to agree to the loan transfers?
For a start, uncollateralised loans, if they default, would require the institutions to call on full loan loss reserves which would directly affect their capital adequacy.
Also, the court would be drowned with bad debt cases which could take years to clear. Once creditors obtain court decisions, how could they enforce payments from debtors with no collateral?
Naturally, there would be a number of debtors who cannot afford the NDRA's monthly payment conditions.
In such cases, the NDRA will not be the answer and, unfortunately, they might need to go through court procedures or through conventional debt restructuring programmes. The NDRA would reserve the right to refuse lack-of-ability-to-pay cases.
There are few rules to the NDRA scheme. First, the rule of "No Bothering". After transferring individual cases to the NDRA, the original creditors would not be allowed to contact customers regarding transferred loans again.
No nasty phone calls, no legal threats. Debtors with payment problems can now focus on their lives and earning money to repay the NDRA. Second, the "Grey List" rule: debtors will not get out from this mess scot-free.
Their names and credit records with the NDRA will be on-line for future creditors to check.
Third, the rule of "Don't Mess with the NDRA". A special court, much like the Central Bankruptcy Court set up to deal with debt restructuring cases after the 1997 crisis, could be established to deal with non-performing loan cases from the NRDA.
Strict rules and speedy procedures could be applied to deal with problem cases. This is to remind debtors that being transferred to the NDRA is not a debt vacation, but a second chance.
Many readers might have a question about informal debt.
I have a column in my table about informal debt with punitive 120% annual interest rates, resulting in monthly repayments of almost 15,000 baht.
I thought about the issue but this is too complex to be dealt with by the NDRA as the lenders are not legal entities under government supervision and are unlikely to agree to exchange loans for the NDRA's papers.
Anyway, let me demonstrate how big the issue is.
Nobody has real data about informal debt. Even the Bank of Thailand had to gather data through field surveys.
Based on the data, it can be deducted that there are about 10.6 million debtors with informal loans with an average debt of 54,300 baht per debtor.
This means that total informal debt is 574 billion baht; not an insignificant amount by any scale.
Managing informal debt problems should be done in two steps.
The first step is to set up a separate organisation to buy informal debts from lenders.
The second step is to transfer these debts from the new organisation to the NDRA.
Political parties are welcome to take up the idea of household debt management in their campaigns.
Who knows? They might win the hearts of the 5 million debtors with repayment problems and the 10.6 million debtors with informal loans.
