Stronger economic growth prospects should support Thailand’s consumer-finance sector through to 2024, but revenue growth could be limited by the interest-rate ceiling on consumer-finance products that was introduced during the Covid-19 pandemic, says Fitch Ratings.

The economic stress that accompanied the pandemic is easing and we forecast real GDP growth to average 3.7% in 2023 and 3.8% in 2024, up from 2.6% in 2022. However, regulators are still focused on the risks posed by high consumer leverage and have retained the ceiling rates on credit cards, personal loans and auto-hire purchase loans that the Bank of Thailand (BoT) lowered by 2pp-4pp during the pandemic. Household debt reached 90.6% of GDP in 1Q23; this is down from a peak of 95.5% in 1Q21, but remains high compared with other emerging markets in the region.

The BoT plans to implement risk-based pricing measures to ensure that the interest rates charged by financial institutions to new retail clients are based on borrowers' risk profiles. However, the policy's details and timing remain unclear and we assume that the regulators will maintain the lower consumer-finance product interest rate ceilings for the next one to two years. This is not only likely to dampen financial institutions' revenue growth, but could also raise sectoral risk if new loans are not priced in accordance with underwriting risks involved. Still, the impact on the sector's overall risk profile is uncertain, as the risk appetite and underwriting standards of individual consumer-finance companies will vary.

Thailand's higher interest-rate environment is also raising funding costs for local consumer-finance companies. Policy interest rates reached 2.25% in August 2023, having risen from 0.50% in July 2022; we expect rates to remain steady for the remainder of 2023 before easing to 2.00% by end-2024. Higher funding costs cannot be fully passed on to many clients due to the rate ceilings, which are fixed rather than linked to a reference rate, and hence will pressure net interest margins (NIM) and profitability.



NIMs at major consumer-finance companies listed on Thailand's stock exchange were generally high in 2022, at above 10%, despite the constraints posed by the lower interest rate ceilings. Among Fitch-rated entities, we believe that the NIM at AEON Thana Sinsap (Thailand) Public Company Limited (A-(tha)/Stable) will remain sufficient to maintain earning buffers commensurate with its ratings. The ratings for other issuers in the sector are support-driven and would not be influenced by narrower NIMs under our base-case rating assumptions.

Increasing the caps would allow consumer-finance firms to charge interest rates that justify the risks involved in lending to clients with weaker credit profiles. This would improve financial inclusion, which is another key objective for the BoT, but could also raise household leverage. Under our baseline assumptions, we believe that household debt/GDP will remain elevated, but higher levels of economic growth and responsible lending practices could support the ability of borrowers to service debts.