Financial markets/Financial institutions : Interest on Loans and Deposits

Overview

• A variety of interest rates are at play in the Thai financial system. There is the Policy Interest Rate, used by the central bank as a tool to send financial policy signals. There are short-term money market interest rates, reflecting transactions among financial institutions; such transactions typically are for six months or less. There are bond yields, reflecting transactions in the debt market. Finally, there are bank interest rates with institutions, businesses and individuals.

• Bank interest rates include both the interest charged on loans and the interest paid on deposits. The principle transactions engaged by banks are making loans and accepting deposits. The Bank of Thailand (BOT) requires banks to publish their interest rates, fees and other charges. The difference, or margin, between interest on loans and interest on deposits is a basic indicator of net interest income. This margin is the principal source of bank income. In itself, it is not the best assessment of income for a real business as it does not include bank assets, other indebtedness, or hidden costs such as operating costs and joint capital reserve fund payments to the Deposit Protection Agency.

• Different rates are paid for deposits in Thai currency and for foreign currency deposits (FCD), for customers that reside in Thailand and for those abroad. Thai currency deposits are further classed by type of account and duration. In general, there are checking accounts, which do not earn interest, ordinary savings accounts, fixed-term deposits of three, six, 12, 24 and 36 months and other account structures designed by the particular bank. There are similar types of FCD accounts, including checking accounts, savings, and fixed-term deposits of one, three, six, nine and 12 months. There are FCD accounts for many different currencies.

• The interest charged on loans varies by type of loan. There are three principle rates: The Minimum Loan Rate (MLR), charged for long-term, large customer loans; the Minimum Overdraft Rate (MOR) charged on overdrafts; and the Minimum Retail Rate (MRR), charged on loans to individuals. The MLR is the lowest rate followed by the MOR then the MRR. Other standard rates include, for example, loans secured by deposits large enough to cover the loan (MFI, MSI, KFJ, MSJ). Other types of loan may have specially tailored interest rates according to bank policy, for example, home loans and credit card and personal loans. There are supplementary interest rates on late payments as well.