Debt moratorium will sow seeds of destruction for credit culture

The government will allow debtors of state-run banks to suspend principal repayment for three years. They will also benefit from an interest-rate cut of 3 percentage points.

The Finance Ministry estimates the cost to the government for subsidising the state banks will be Bt22.85 billion. It expects the new scheme to cover 3.76 million borrowers with combined outstanding loans of Bt459.11 billion

Each beneficiary’s debt must not be more than Bt500,000, which cannot include leasing or home loans.

One of the reasons for debt suspension is that the government now wants to reward high-credit-rating borrowers, having already implemented a debt moratorium for poor-credit-rating borrowers.

Deputy Finance Minister Tanusak Lek-uthai, who said the aim was to help low-income groups, argued that the previous debt moratorium initiated by former prime minister Thaksin Shinawatra’s administration had not posed any problems.

""The poor never destabilise the financial market," said Tanusak.

Both Tanusak and Finance Minister Kittiratt Na-Ranong have defended the scheme on the grounds that it will not use much taxpayer money, since the state-run banks will use part of their profits to finance the programme.

However, critics of the measure find ministers’ reasoning unjustified.

"The debt moratorium will damage the credit culture," said Nipon Poapongsakorn, president of the Thailand Development Research Institute, an independent think-tank.

Nipon said that he did not understand why the government was meddling in this area, since borrowers with a good repayment record were capable of servicing their debts.

Most of these debtors are clients of the Bank for Agriculture and Agricultural Cooperatives and the Government Savings Bank.

Former finance minister Korn Chatikavanich criticised the scheme as an unnecessary additional burden on taxpayers. He also predicted that the Pheu Thai-led government would extend the scheme after three years as a sop to voters ahead of the next general election.

Another likelihood is that some people who borrow from state-run banks will later group together and protest to demand a further debt moratorium, Korn posted on his Facebook page.

He also raised the question of why state bank customers were being offered privileges that were unavailable to customers of commercial banks.

He added that the previous coalition government led by the Democrat Party had implemented a debt-relief scheme for people owing money to loan sharks by allowing them to borrow from state-run banks to pay off that debt.

"I feel that the cost of a Thaksin amnesty and saving the face of the government is really high, and worse, we the taxpayers are paying that cost," said the former minister.

His comment is very interesting. Confidence in the government is waning due to the recent bomb blasts in Hat Yai, the massive flooding last year and the rising cost of living. The fact that Pheu Thai lost a parliamentary seat in a by-election in Patum Thani province is also a bad sign for the coalition.

Moreover, labourers are unhappy as they have not yet received the minimum wage of Bt300 per day without any conditions, as the government had promised, while the business community is not happy with the administration’s heavy-handed intervention in the labour market and rice trading.

Business leaders’ campaign against corruption is also getting more support, which means the reputations of politicians are at risk.

At the same time, fugitive ex-PM Thaksin is vowing to come home.

These factors may be the real reasons behind the government planning to implement as many populist measures as possible in order to win political popularity.

Yet, economists have criticised the inefficiency of populist schemes implemented by both the current and past governments

International financial institutions such as the Asian Development Bank (ADB) have advocated governments around the world to adopt specific measures targeted at disadvantaged groups, such as targeted transfers in times of economic hardship.

The ADB and economists are against government fuel subsidies implemented by both the Democrat and Pheu Thai governments, as such a policy does not discipline consumers to save energy. It is more acceptable if the government offers cash handouts during a period of rising living cost to those in greatest need.

But providing a debt moratorium for those capable of paying off their debts is to sow the seeds of destruction for the country’s credit culture.