The Bank of Thailand has expressed concerns over declining asset quality among higher-income borrowers, following a similar trend observed for middle- to lower-income groups, aligning with the softening of economic growth.
According to the edited minutes of the central bank's Monetary Policy Committee (MPC) meeting held on Feb 21-26, some members voiced concerns about the deterioration in loan quality among low-income groups, which could potentially extend to higher-income groups.
A further decline in loan quality could prompt financial institutions to adopt more cautious lending practices, especially for mortgages and hire-purchase loans.
In response, these institutions have already started exercising greater caution in approving high-value mortgages, a trend the regulator plans to monitor.
Although overall loan growth and credit quality showed signs of stabilising, financial institutions remain cautious due to a slowdown in loan growth. Business loan growth was primarily driven by large corporations, while loans to small and medium-sized enterprises (SMEs), particularly in industries facing structural challenges, continued to contract, according to the minutes.
"SMEs are facing additional liquidity pressures due to the deterioration of trade credit, with most experiencing longer receivable credit terms," noted the minutes.
Retail loans have also declined, partly due to households that have not fully recovered and continue to face high debt burdens, said the MPC, making it crucial to monitor the outlook for loan growth and credit quality, particularly for SMEs and vulnerable households.
Some MPC members said the resurgence in loan growth at the end of last year may have been driven by specific factors, including an acceleration in lending activities by financial institutions to meet annual targets.
Despite this, household debt deleveraging continued, helping to mitigate longer-term financial stability risks, noted the minutes.
The MPC viewed the Thai economy as slowing more than expected in 2024. While domestic demand, tourism and merchandise exports continued to grow, these factors provided limited support to the manufacturing sector because of a significant inventory drawdown and increase in imports, according to the regulator.
The MPC projects Thai economic growth of slightly more than 2.5% this year, a downgrade from previous forecasts, attributed to ongoing structural challenges, increased competition in the manufacturing sector, and the impact of US trade policies.
Industries such as automotive, petrochemicals and construction materials continued to face structural constraints and intensified competition from imported goods, though the service and tourism sectors maintained their growth trajectory, noted the minutes.
The report also highlighted the significant uncertainty surrounding US trade policies, particularly in terms of their structure, implementation, timelines, and potential retaliatory actions by major economies.
If the US increases tariffs on Chinese goods to 30% and imposes a 10% tariff on goods from high-risk countries, including Thailand, Thai economic growth could be reduced by around 0.3-0.5 percentage points from the baseline, noted the minutes. The effects of these measures should materialise in the second half of the year, said the MPC.