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22 Oct 2024

Econ Digest

Commercial banks start cutting lending rates, leading to easing financial costs in the credit market

คะแนนเฉลี่ย
  • Commercial banks start cutting lending rates in line with Thailand’s policy rate.
        About one week after the Monetary Policy Committee (MPC) decided to lower its policy rate on October 16, 2024 (from 2.50% to 2.25%), several commercial banks announced reductions in their loan interest rates by up to 0.25%, effective from the beginning of November 2024, and extended their debt assistance measures for vulnerable clients until the end of the year.

        KResearch holds the view that the lending rate cuts of commercial banks represent one of the mechanisms to transfer easing financial costs, in line with the policy rate direction, in the credit market. KResearch estimates that retail and business loans likely benefiting from reduced lending rates by the end of 2024 account for approximately 40.9% of total loans in the Thai banking system. The rate cuts are expected to lower interest costs for retail and business borrowers by nearly THB1.3 billion (calculation of the reduced interest burden specifically for the period of November-December 2024, excluding loans that will enter their interest rate adjustment period next year).

  • The move may not trigger a change in borrowers’ monthly installment payments, but debtors will benefit from other aspects instead.
        In practice, a 0.25% interest rate cut is unlikely to impact monthly installment payments, or in other words, will not immediately reduce the debt service ratio (DSR) of debtors. This is because general loan contracts for retail debtors such as home loans and personal loans with collateral during floating a interest rate period, and business investment loans, especially for SMEs, typically require fixed monthly instalment payments that cover both interest and principal payments. Regarding the impact of interest rate reduction, while the monthly instalment payments remain unchanged, commercial banks or financial institutions will increase the principal repayment portion and reduce the interest repayment portion. As a result, debtors will be able to pay off their debt sooner. Nonetheless, debtors still need to reserve funds for their regular monthly installment payments as usual.
        In addition, if debtors want to reduce their overall expense burden more effectively, they may need to reduce other expenses. The top 3 household expenses are food, beverages and tobacco; housing and household essentials; and vehicle and travel expenses. Meanwhile, the top 3 business costs, especially for SMEs, are raw materials, labor, and rental fees. All of these expenses are significantly larger than interest expenses.

  • For the full-year 2024, KResearch projects that loan growth in the Thai banking system may be no more than 1.5%. This is because the declining financial costs, in line with a downward trend in the policy rate, are just one of many factors affecting loan disbursements. Both individual borrowers and businesses are thus likely to consider other factors, especially the overall Thai economic situation and outlook, which will affect investment plans, consumption, and future debt repayment ability, before deciding to take out loans.

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Econ Digest

ธนาคารinterest rate