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Business trends

Thai lenders brace for stricter mortgage rules

Banks urge caution on move while pivoting to small-business loans

Half-built condominium towers loom over Bangkok. The Bank of Thailand plans tighter mortgage standards next year to curb speculation in real estate.   © Reuters

BANGKOK -- Commercial banks in Thailand are bracing for the central bank's plan to impose tighter standards for mortgage lending, a move that will hit a major part of their business.

Among those voicing concern is state-owned Government Savings Bank, the country's fourth-largest lender.

The Bank of Thailand should take into consideration the potential impact from the new mortgage rules on the property sector, Chief Executive Chatchai Payuhanaveechai said, according to local media. The CEO warned that the residential market will cool down, with ripple effects for housing-related employment.

The central bank announced on Oct. 4 it would adopt stricter down payment requirements to deal with a high rate of mortgages turning sour in a nation with ballooning household debt.

The new rule requires people who buy a second home to make a down payment of at least 20% of the value in order to qualify for a mortgage exceeding 10 million baht ($300,000). This aims to curb loan-to-value ratios at 80%. The higher the ratio, the bigger the risk for lenders.

Lenders will also be prohibited from providing advances that exceed the value of a property. The rule will enter into force by January.

"This is a preventive measure that will help reduce risks in the real estate sector and help create a good credit culture that encourages lenders to loan to homebuyers appropriately," said Wajeetip Pongpech, the central bank's assistant governor overseeing financial institutions. "It will also help prevent increasing household debt and reduce excessive peculation in real estate."

While urging the central bank to weigh the consequences of the move, local lenders are taking steps to offset a decline in mortgage lending. Mortgages are a big business for Thai banks, accounting for 17% of systemwide loans and about 50% of total retail loans at the end of first quarter of 2018.

Bangkok Bank, the country's biggest private lender, has set a goal of growing lending to small and midsize businesses 5% this year, up from 4% in 2018. Bangkok Bank's housing loan growth slowed to 11% in 2017 from 15% in 2011.

Kasikornbank aims for an increase of 4% to 6%, up from 4% to 5% in the previous year, in small-business loans this year, particularly in the sectors of tourism, logistics, food processing and construction. These are expected to grow rapidly, supported by the government's promotion of investment in the Eastern Economic Corridor, the country's flagship economic zone, with a focus on small and midsize enterprises.

Krungthai Bank, the country's second-largest bank by assets, has set a small-business lending growth target of 6% to 7% this year, up from around 200 billion baht in loans to small and midsize enterprises in 2017. Bank of Ayudhya, a Thai lender majority-owned by Japan's Mitsubishi UFJ Financial Group, aims for total loan growth of 6% to 8% this year, of which more than half is to go toward the government's much-promoted Thailand 4.0 economic strategy and small and midsize enterprises.

Deterioration in mortgage underwriting quality can have significant effects for banks if property prices decline substantially, credit rating agency Moody's Investors Service said in a recent analysis.

"The latest move from the BOT is a clear message that alerts lenders to adjust their lending portfolios," said Naris Sathapholdeja, head of TMB Analytics.

For Thai banks, housing loans are the only type of consumer debt where the ratio of bad loans has been increasing. Nonperforming housing loans have risen to 3.4% of the total so far this year, prompting the central bank to step in. An analyst at Asia Plus Securities notes that the nonperforming loan ratio for credit cards and personal loans is 2.5%, and for auto loans, only 1.5%.

Household leverage -- a measure of how indebted Thais are -- remained at 77% of gross domestic product at the end of June, even as economic growth has slowed, Moody's reported. According to the credit rating agency, relatively low interest rates have helped lift residential property prices in the Bangkok area by 49% in the past 10 years. Prices of condominiums have jumped 78% in the same period.

Analysts welcome the new rule as the sort of proactive measure that will lift lending standards among Thai banks.

"The new mortgage-lending rules are credit-positive because they will help to reduce speculative buying and require banks to focus on borrowers with better credit quality," Moody's said in a statement.

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