Lending rate cuts...generate over THB16 billion in net benefit to economy (Business Brief No.3813)

Within one week after the Bank of Thailand announced a policy rate cut, major Thai commercial banks have followed suit by cutting lending rates for their general customers. These banks have slashed their minimum overdraft rate (MOR) and minimum retail rate (MRR) by 12.5-25 basis points, but are keeping their savings and fixed deposit rates unchanged. KResearch analyzes the commercial banks' move to pass on the central bank's rate cut as follows:

• The reduction of lending rate will directly benefit small and medium-sized enterprises (SMEs) and housing loan borrowers by lowering their financial costs. This is because MOR and MRR are used as reference rates in setting the lending rates for SME loans, for both working capital loan and term loan. KResearch estimates that the reduction of lending rate by 12.5-25 basis points per year will help more than 1.7 million SME customers who have borrowed loans from commercial banks, translating into financial cost savings for SME customers of around THB10 billion per year.
  
        When including retail borrowers, especially housing loan borrowers and certain personal loan borrowers with collateral such as “home for cash" loans, for which interest rates are linked to MRR, this round of lending rate cuts will reduce financial costs for retail borrowers by an additional THB6 billion-7 billion per year. Therefore, in total, the latest round of lending rate cuts will help ease the burden of SME and retail borrowers by THB16 billion-17 billion per year, serving as a catalyst for 0.1 percent of gross domestic product (GDP) growth.
• Regarding the impact for Thailand-registered commercial banks, the lower rate may affect their revenue due to a decline in  interest income, pressuring net interest margin (NIM) in 3Q19 to around 0.06 percent, compared to the 2.86 percent of NIM in 2Q19 (based on the impact expected in the remainder of 3Q19 and exclusion of impacts from other factors). Nonetheless, commercial banks may enjoy a gradual recovery of fee-based income from other activities, such as agent fees from selling insurance products and mutual funds as well as management fees. Moreover, commercial banks have also streamlined their cost management. These efforts should help commercial banks mitigate the effects of rate cuts on their overall profitability.

The fact that the commercial banks have lowered lending rates but have kept their deposit rates unchanged has contributed to positive impacts on the overall economic system and the business sector via reduced financial costs. Eventually, commercial banks are likely to adjust their business strategies by lessening the competition on pricing for deposit products, starting with special deposit products. The commercial banks' decisions on whether to lower their general deposit rates will depend on market competition and their ability to maintain their respective market shares, as well as the central bank's signals towards future interest rate cuts.