October 11, 2018
Unless checked, the problem will exacerbate problems for several southeast Asian countries.
On Wednesday, Thailand’s The Nation reported on a stunning survey. A poll conducted among 1,171 indicated that up to 78 percent of Bangkok residents—meaning roughly 6 million people—are in debt.
These are typically small and medium-sized loans. Forty percent of those who said they owe money said they owe around $3,000 and thirty percent said they owe between $3,000 and $15,000.
But even more shocking than the number of people who owe, is the number of those loans that appear to be at risk of being defaulted on. The study found that more than half—53 percent—of those who are in debt admitted to having fallen behind on repayment. This is a serious issue that could leave the Thai population more vulnerable to economic shocks.
Thailand has a high level of household debt as a percentage of nominal GDP. Thailand’s household debt accounted for 78 percent of the nominal GDP as of December of 2017—that figure is down from an all-time high of 80.8 percent in 2015 according to CEIC a US-based data research company that used information from the Bank of Thailand and the country’s National Economic and Social Development Board to determine its figures.
So what is the government doing to address the country’s high level of indebtedness?
There are two primary government initiatives to bring these loans under control: The Debt Collection Act and the Bank of Thailand’s Debt Clinic.
In September of 2015, the Debt Collection Act went into effect. The Act attempts to regulate the way creditors collect debts, banning unscrupulous collection tactics, and give individual debtors increased protection and rights. But awareness and enforcement of the Act remains low. According to the study cited by The Nation, only about 40 percent of respondents knew about the rights they hold under the 2015 legislation.
Similarly, awareness of the Bank of Thailand’s Debt Clinic remains equally low with around the same percentage of people reporting a familiarity with the program.
The Debt Clinic kicked off in June of 2017. The program pools bad loans from 16 participating local and foreign commercial banks. The hope is that, if pooled together, these loans could become performing assets. Participants restructure their debt and are then prohibited from running up new debt for five years. They must also take courses on financial literacy and fiscal planning.
The problem with the Debt Clinic is that the bar to entry is prohibitively high. According to local news from when the program first began, 17,000 people have applied to join the scheme, but after verification of their qualifications, only 20 percent of those debtors were found to be qualified to participate in the scheme.
That trend continued. According to the Bangkok Post, from its founding until April of this year, 33,736 borrowers had applied to join the program with only 1,074 having been accepted.
Since that point, the eligibility requirements have been relaxed, with self-employed workers and other formerly ineligible categories of debtors now allowed to participate. It was anticipated that the relaxed requirements, which went into effect in May of this year, would allow an additional 50,000 people into the scheme. But even that higher number is a drop in the bucket compared with the scope of the country’s indebtedness.
Thailand isn’t the only country in the region with worrying levels of debt. In Cambodia, small debts, mostly borrowed from Microfinance Institutions, or MFIs have become commonplace.
It’s a trend that has caused the national total household debt figure reach all-time highs for the past three years. In April of 2018 household debt reached $3 billion according to CEIC using data from the National Bank of Cambodia. And the MFI sector has been growing accordingly. The sector increased by 25 percent in 2017, reaching 1.75 million debtors at the end of 2017.
The loans people take out are typically small—$1,000, $2,000, $3,000—and are typically used to purchase household items like cell phones and motorbikes. In a country with no minimum wage, where many individuals make less than $500 per month, those loans can become crippling burdens.
And, more people do appear to be struggling to pay. According to the National Bank of Cambodia the rate of microfinance loans with overdue payments nearly doubled from 2016 to 2017.
When Cambodians are unable to pay their debts, they are often forced to sell off land and property, and although it’s difficult to confirm, there have also been reports of workers at factories selling their debt to their bosses, and essentially working as indentured laborers to pay off their loan.
The latest World Bank Economic Update for Cambodia lists “overindebtedness after years of rapid loan expansion and accelerated rates of penetration of loans in households” as a point of concern.
The report urged the country’s banking and microfinance sectors “to adopt lending guidelines and ensure adequate monitoring, while revisiting the non-performing loan classifications.”
The Cambodian government has responded to the explosion of MFI loans by distancing themselves from the operations, forcing MFIs to declare themselves as private institutions. And, since April of last year, the interest rates on new loans from MFIs was set to a maximum of 18 percent. Previously MFI loans could bear interest rates of up to 30 percent per year.
Malaysia has one of the highest levels of household debt as a percentage of nominal GDP at 84 percent. And, according to a Risk Developments and Assessment of Financial Stability Report by Bank Negara, nearly half of that debt—49.7 percent—is spent on non-housing items like cars credit cards and personal loans that depreciate in value quickly.
One worrisome aspect of this trend indicates that this culture of indebtedness and financial risk is particularly prevalent among the country’s youth. A report in The Star from August found that some 65,000 Malaysians between 18 to 44 years old have declared bankruptcy in the last five years.
Overindebtedness even extends to those who work for government. A study published by Malaysia’s central bank at the end of September which polled 1.26 million out of 1.6 million civil servants found that the country’s civil servants spend more than half their salaries on loan repayment.
And almost half—47 percent—of the borrowings of government employees are for lifestyle and consumption purposes such as personal financing, vehicles and credit cards. The rate among civil servants is higher than the national average of 35 per cent.
Southeast Asia is a region that has seen enormous and swift economic growth in recent years, and while the size of these individual loans might be small, they indicate a potentially disastrous trend that could contribute to the vulnerability and volatility of these markets.