Debt bailout warning

The Paetongtarn government has announced a bold policy to address Thailand’s mounting household debt crisis. The initiative includes a three-year suspension of interest payments for mortgages, vehicle loans and loans for small and medium-sized enterprises (SMEs), among other items.
Covering a debt portfolio of 1.31 trillion baht, the policy aims to provide relief to borrowers and boosttheir purchasing power, which in turn is expected to stimulate the economy. This measure is intended to benefit three groups of debtors — those with mortgages of up to 3 million baht, vehicle loans of up to 80,000 baht and SMEs with loans of up to 3 million baht. It is projected to assist nearly 2.3 million accounts across these categories.
With household debt levels in Thailand remaining alarmingly high at 89.6% of GDP in the second quarter of 2024 with outstanding loans reaching 16.32 trillion baht, addressing this issue is indeed an urgent priority.
However, this audacious debt haircut can be risky and costly. To compensate commercial banks for their reduced interest income, the Ministry of Finance will lower the fee that commercial banks have to contribute to the Financial Institution Development Fund (FIDF) from 0.46% to 0.23%. This decision effectively shifts a part of the financial burden to the public, raising concerns about its long-term fiscal implications.
The biggest concern is moral hazard. Being spared from their own responsibilities, borrowers might take on additional or excessive debt in the future, in the hope the government will help clear their debt again. This undermines financial discipline, perpetuating a cycle of dependency on government intervention. Borrowers may also deprioritise paying off their principal debt or other financial obligations, further weakening the repayment culture. For financial institutions, this creates a disincentive to lend to low-income households or high-risk borrowers, potentially increasing borrowing costs.
Another concern is the potential misallocation of relief funds. Instead of using the financial relief for productive expenditures, some borrowers may divert it to non-essential spending, such as entertainment or wasteful goods, which would fail to generate the economic boost envisioned by the government.
Perhaps the most contentious issue is the exclusion of borrowers who have consistently met their repayment obligations. This debt suspension policy is for delinquent borrowers who fail to service their dues by no more than one year. Responsible borrowers may feel overlooked and unfairly treated, which could create a psychological divide between those who comply with their obligations and those who do not. Over time, this imbalance risks eroding financial discipline and discouraging late repayment.
While the government’s commitment to addressing household debt is commendable, measures must be sustainable. Past debt relief initiatives have often disproportionately favoured delinquent borrowers, leaving responsible ones without support or recognition. This approach not only undermines fairness but also weakens public confidence in the system.
The government must pair these relief measures with financial literacy programmes and structural reforms that address the root causes of over-indebtedness.
Household debt is a pressing issue that demands immediate action, but counter measures must be carefully calibrated to limit negative outcomes. While this policy offers temporary relief, it must not come at the cost of fiscal stability.