For decades, economic growth in Thailand has been driven and defined by tourism and exports. However, while tourism remains steady, the demand for exports has slowed. There is one other significant economic problem that refuses to abate - household debt.
Thai households are among the biggest borrowers in Southeast Asia, (itself a notoriously complicated region for debt collections) and they are finding it increasingly difficult to keep up with payments. An October 2018 survey by Bansomdej Poll in collaboration with the Foundation for Consumers (FFC)’s Chaladsue (Smart Buyer) magazine indicated that up to 77.5% of Bangkok residents - over 6 million people - are in debt. Even more shocking, however, is the fact that more than half (53%) of those who are in debt have fallen behind on repayments and are in danger of defaulting on their loans.
Thailand continues to represent the region’s second-largest economy, and definite improvements are being made across the retail banking sector. But what are they, and are they working?
Retail banking in Thailand today
Commercial banks dominate the financial landscape in Thailand, with the top five banks accounting for around 70% of all commercial banking assets. There are also eight specialised financial institutions, which are government-owned and provide banking services to sectors that are not sufficiently served by the commercial banks, including agriculture, housing, SMEs and rural businesses.
In Thailand, there is a push and pull between the ‘old ways’ of brick-and-mortar branches and the ‘new ways’ of digital banking. According to Deloitte and the World Bank, Thailand is still heavily reliant on traditional brick-and-mortar banking. However, it also has one of the highest levels of digital interaction at 73%, compared to the US at only 46%.
Sasapak Kiatsommart, team head of retail marketing management at TMB Bank, said: “People still go to branches not because they want to, but because they have to, to open accounts and apply for loans.” This suggests that many Thai consumers are waiting for a digital revolution to intervene and transform the way that retail banking in the country works so that they can comfortably and safely do all of their banking digitally.
There is, however, already digital transformation happening in Thai banks. Indeed, there has been for some years now. The vast majority of it originally came from collaboration with fintechs. EY’s data showed that in 2017, there were over 128 fintechs in Thailand, with a total of $12 million in fintech investments. Today, fintech adoption continues to drive local banking trends, with 51% of Thai banking users now using their phones to conduct their banking activities. Still, when compared to other Asian countries, there is plenty of work yet to be done.
Back in 2017, digital banking penetration in Thailand was only at 19% (far behind Singapore’s 94%). Fast forward two years and it’s now ranked No.1 for mobile banking users globally, second for ownership of cryptocurrency, and third in mobile commerce. Indeed, 74% of the population now use online banking. This paints a picture of a society that is very much on board with the digital revolution, meaning that what comes next for the country’s banks needs to be digital-first, mobile-focused and customer-centric.
Of course, there is a middle ground to be found between going ‘all-in’ on digital and staying on the traditional path - adaptation. Many Thai banks are already fast-tracking the transformation of their brick-and-mortar branches to survive the push for digital integration. At the Bangkok Leg of the 2019 Asian Banking & Finance Retail Banking Forum, over 50 bankers, industry players and speakers exchanged ideas on how the traditional model should evolve in response to changing customer mentalities.
Some of the industry’s big thinkers felt that the rapid digitisation of the sector risks deepening the digital divide. Chris Jenkins, COO of Thailand and GMS representative offices at Standard Chartered pointed out how the advent of digital banking in the UK resulted in a backlash as many people could not easily afford and access the technology. However, it would appear that Thai people are now eagerly embracing tech in a manner that might mitigate any potential backlash.
Of course, whilst banks still need to progress to paperless and move forward with their digital ambitions, they should not completely phase out human touch points. According to Arapat Sangkharat, EV of transformation at Krungthai Bank, their branches have evolved to take on advisory roles and focus on sales beyond day-to-day deals. These branches have been designed to look more like retail stores and have used subtle digital transformation. He explains that these new enhanced branches “change the customer journey because it’s not about coming to a branch, pushing a button to queue and sitting there waiting to do your transaction, when a lot of the transactions can be done upfront.”
These digitally transformed branches feature more personalised services with the help of technologies such as facial recognition and paperless Know Your Customer authentication processes, but still leave room to integrate human beings for those who require a more personal touch. The key with digital is for it to help human touchpoints, rather than replace them. The best of both worlds, you might say, and maybe that’s the most desirable future for Thai banks.
Debt collections in Thailand today
Gross NPL volume in Thailand reached a serious high of $11.6 billion in Q2 2017, representing a 20% year‐on‐year increase. Declining household income (particularly in the manufacturing and export sectors) prompted a rise in consumer loans, predominantly personal and credit card loans. More debt creates more loans and more loans create more debt. It’s a vicious cycle.
To address this debt cycle, two primary government initiatives have been created to bring these loans under control: The Debt Collection Act and the Bank of Thailand’s Debt Clinic. The Debt Collection Act came into effect in 2015 to regulate the way creditors collect debts, bans unscrupulous collections tactics and gives individual debtors increased protection and rights.
Awareness and enforcement of this act still remain low four years later, however, as does awareness of the Debt Clinic which kicked off in 2017. This initiative is essentially the central bank's mechanism to lower the country's household debt-to-GDP ratio, which currently sits at 78.6%. That’s down slightly from 80.8% in 2015, still the third highest in Asia. The Debt Clinic pools bad loans from 16 participating local and foreign commercial banks in the hope that they can become performing assets. Participants restructure their debt and are then prohibited from running up new debt for five years. They must also take courses in financial literacy and fiscal planning.
The problem with the Debt Clinic is that the entry bar is prohibitively high. According to local news outlets, 17,000 people initially applied to join the scheme. But after verification of their qualifications, only 20% of those debtors were qualified to participate. That trend continued. According to the Bangkok Post, from its founding until April 2018, a grand total of 33,736 borrowers had applied to join the program and only 1,074 were accepted.
In the last 12 months, however, eligibility requirements have been relaxed, with self-employed workers and other formerly ineligible categories of debtors now allowed to participate. This year, the Thai Central Bank also expanded the program to include 19 non-bank financial institutions and is now targeting 490,000 borrowers holding ฿49 billion in debt. Even that higher number is a drop in the bucket, however, when compared with the sheer scope of the country’s indebtedness.
JMT Network Services, Thailand’s top unsecured consumer debt collector, expects consumer debt to rise even further in the next 12 months, with housing loans making up half of the total. Sutthirak Traichira-aporn, chief executive of JMT, which buys bad loans and provides debt collections services for 3.2 million distressed debt accounts worth 128 billion baht, said: “As consumer loans increase, bad debt will also rise. Now we also see more secured loans, particularly home loans, turning sour. We are buying more of that too.” Good news for JWT, maybe, but bad news for the country.
The Bank of Thailand’s figures reveals that, in the last 15 years, the economy didn’t grow due to production efficiency, but due to sheer borrowing, with debt growing at a faster rate than GDP growth. According to Chartchai Parasuck, a freelance economist for The Bangkok Post, the reason that Thais have accumulated so much debt is that “their income rises slower than consumption demand and demand is fulfilled by easy credit from financial institutions.”
So, does the fault sit with the banks who are too eager and willing to extend lines of credit to households that they know will probably never be able to pay it back? It certainly can’t lie with the people themselves. Around half of the Thai population works in the agricultural sector, which simply doesn’t generate enough income to sustain a decent living (40% of them live under the poverty line). So what choice do they have but to borrow? Either way, something has to give.
Initiatives such as the DCA and the Debt Clinic are a good start, of course. The government’s forward-thinking regulatory frameworks are also helping to grease the wheels. But to really get a solid handle on the situation, banks and lenders need to help the government’s cause by considering a more thorough investment in digital transformation. With digital banking adoption in Thailand currently the highest in the world, the infrastructure is already in place to make this a reality and the public are obviously receptive to customer-centric digital solutions. The debt collections sector really needs to lean into this trend in the coming months and years if it wants to avoid becoming the antiquated arm of the Thai retail banking world.
Completing the puzzle
Regulation has improved and, thanks to the debt collections law of 2015, the old ways of intimidation and unscrupulous practices are mostly behind us. But the debt collections landscape in Thailand might still seem severe.
There are, however, definite advances being made by the government. It’s working continually to resolve the household debt problem by promoting financial knowledge, issuing measures to regulate credit cards and personal loans under the supervision of the BOT, and establishing debt relief clinics.
The strong advances made in the digital retail banking sector are also very encouraging and Thailand has a great variety of innovative fintech startups willing to collaborate with traditional banking systems, rather than work against the industry. Banks, meanwhile, have been working with fintechs to bring new services to the market.
The ideal solution would be one that stops bad debts happening in the first place, and digital solutions will certainly help in that regard. The way forward for retail banks and debt collectors in Thailand is to continue pressing ahead with digital transformation to make banking and debt collections even more approachable and convenient, without underestimating the other pieces of the puzzle.
Interested to know more about the economic and debt picture in APAC? Check out our overview of the region’s various efforts.