Microfinance loan rates set to rise

The Bank of Thailand in conjunction with the Ministry of Finance are currently drafting regulations which will permit financial and non-financial institutions to offer microfinance loans at interest rates as high as 28 percent per annum, and possibly even higher.

The aim is to be able to offer loans to low-income (eg, day labourers) and non-formal workers (street vendors, wet market traders, motorbike taxi drivers and the like) at rates which are still high but far better than those offered by loan sharks.

At present, the law limits a general loan to a maximum interest rate of 15 percent. Credit card loans, including penalty fees, are limited to a maximum of 20 percent a year, and personal loans are capped at 28 percent.

Under the new proposals there has been a suggestion the highest rates might even exceed 28 percent and go as high as 33 percent. While this is high, compared to the illegal interest rates charged by loan sharks, if it was approved it should allow those institutions prepared to offer loans on a microfinance level to attract a great deal of business.

The big question is whether many financial institutions would want to go down that rocky road. The Government Savings Bank (GSB) hosts what is termed the People’s Bank project, which is currently the only source of loans for low-income and non-formal workers.

The loans are limited to a maximum of 200,000 baht per borrower. At present, the number of non-performing loans (NPLs) at the People’s Bank stands at 3.08 percent which is considered quite high.

The management of the GSB has noted that there is hardly any profit to be made from the microfinance business as it currently stands when considering the numbers of employees required to maintain the service. The GSB currently has 67.7 billion baht outstanding in loans as part of the People’s Bank project, and welcomes the possible entry of other major financial institutions into the market as it says it cannot keep up with the demand.

The Finance Ministry’s Fiscal Policy Office (FPO) said it would be responsible for issuing licences to non-financial institutions and allowing them to charge interest rates above 15 percent per annum in an attempt to compete with the loan sharks.

The Bank of Thailand would be responsible for taking licence applications and examining their qualifications before passing on their recommendations to the FPO.

By raising the level of interest rates the government is also hopeful of encouraging loan sharks to legitimize themselves because they will be able to see the legal profit margins are worth coming under a legal umbrella instead of remaining essentially outside the law.