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4 Nov 2011

Financial Markets

SME Loans over Remainder of 2011 Decelerating due to Flooding (Business Brief No. 3202)

With the worst flooding in decades, floodwaters are encroaching upon inner Bangkok, while the current situation remains uncertain. Based on a scenario where flooding in Bangkok and some eastern industrial estates will gradually recede and disappear in December, the Thai economy in 4Q11 will likely drop dramatically, causing the overall 2011 GDP to decrease to only 0.9-1.7 percent.
This crisis may also inhibit SMEs, with a loss of THB89-143 billion experienced in non-agricultural sectors, due to temporary unemployment, lower purchasing power of flood-affected consumers, paused production by some large manufacturers within the same supply chain, difficulties in travel and product shortages. As 20 percent of all SMEs in Thailand are located in Bangkok, the business center of the country, business losses will be high.
Regarding the impact on SME loans at commercial banks listed in Thailand, trade finance and term loans during 4Q11 are expected to drop during flooding period, due to sluggish economic activities. Nevertheless, demand for overdraft (OD) loans should remain stable to higher, as per business conditions, with short-term demand for balancing liquidity and covering basic expenses.
Due to the above factors, coupled with a high base from last year, it is expected that SME loans overall, in the worst case scenario, will likely decelerate to 7 percent growth YoY by the end of 2011, against the 13.5 percent growth at midyear. After flooding subsides and the situation returns to normal, it is expected that SME customers will apply for more loans to support their business rehabilitation and resume their operations, thus spurring SME loan growth at Thai commercial banks next year.

Also, this situation will unlikely result in a significant increase in NPLs, as banks are offering many financial supports on the assumption that flooding is a force majeure that will not hurt business competitiveness over the long term. Also, the Bank of Thailand has already lessened criteria on loan classifications to improve eligibility for financial supports over the next 6-12 months, allowing banks to control NPLs at a manageable level.

Financial Markets