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11 Mar 2005

Financial Markets

Personal Loan Interest Rate Caps: Impacting Consumers and Creditors

On February 10, 2005, the Bank of Thailand (BOT) held discussions with personal loan providers, including banks and non-bank financial institutions, on the establishment of interest rates and fee controls, following some discussions on these issues late last year. There is the possibility that the central bank may establish measures to control personal loans in the near future. In this regard, Kasikorn Research Center (KRC) takes the view that the BOT may put weight on the priority of consumer protection in the establishment of interest rates and fees, as well as on controlling risks from household debt creation.

KRC also views that if the policymakers set a ceiling on personal loan interest rates, it will help rid us of the problem of creditors taking advantage of consumers through excessive interest rates. This will also indirectly help oversee and supervise creditors so that risks are kept at appropriate levels within a more stringent pricing framework. Under these circumstances, loan quality in the system would likely be improved. Meanwhile, if a minimum income limit on credit applicants is established, problems concerning excessive debt among low-income earners will be curtailed, whilst also helping contain creditors' risks incurred from this customer group, where controls have so far been lax. Still, this measure may have a side effect on low-end customers who may thereafter face difficulties in getting loans from financial institutions, therefore turning to 'loan sharks' instead.

Concerning the possibility of setting loan interest rate ceilings, KRC views that it would likely lead to self-adjustment and changes in loan providers' operations that would have to be tailored to target customer groups and risk levels that they are shouldering, at present. However, as most entrepreneurs in the market currently manage their loan portfolios carefully, it is forecast that the interest rate ceiling initiative should help in reducing operating costs and increasing income from other credit products, so that overall yields remain about the same, while also helping the personal loan business to grow with better quality and more stability. Moreover, it is expected that the impact of controls on personal loans would likely be greater than on credit cards. This would be due to the fact that the personal loan customer base consists mainly of medium- to low-income earners, and thus is larger than the base of credit card customers.

KRC believes that no matter what the new criteria will eventually look like, the authorities will be making estimates and weighing the pros and cons of all concerned issues to best benefit the entire system. The new measures to be issued may only be preliminary guidelines at first, before further adjustments are made in line with prevalent situations and needs in the future.

Financial Markets