BOT wants banks to lower interest spread

Bank of Thailand (BOT) Governor Veerathai Santiprabhob said the current interest rate spread -- the difference between the bank’s lending rate and deposit rate -- is about 2.7 to  2.8 per cent.

Compared to rate spreads  in the region, the interest rate spread in Thailand is in the middle range -- not too large, or too small.

The interest rate spread in Singapore is much lower at 1.5 per cent.

Singapore’s banks have fewer branches, are widely adopting electronic services and most of their customers are big businesses, so lending risks are much lower, he said. This allows banks to offer lower lending rates, he said.

The BOT is not satisfied with the high spread, he said, adding, the high spread is derived partly from the higher operating costs as banks have to have more branches, he said.

Thai banks offer lower lending rates to affluent customers than they do to less affluent customers. Smaller customers also get lower deposit rates from banks as they do not have much bargaining power.

One solution is to open the market for non-bank operators to compete in financial services for retail clients. This could ease the financial burden on those who have little bargaining power, he said.

Many people use the minimum lending rate minus deposit rate, resulting in an interest rate spread of 6 per cent which is misleading because banks have other operating costs, he noted.

The BOT estimates that the real interest rate spread is between 2.7 and 2.8 per cent, he said.

The central bank has succeeded in lowering the fee for financial transactions after implementing the electronic transaction system. Earlier, banks did not charge affluent customers but they levied a fee of between Bt25- Bt30 per transaction on small customers. After implementing the electronic payment system, the fee has been cut substantially.

However, he admitted that it was more challenging to narrow the interest rate spread since lending to rich customers have lower risks while loans to less-affluent clients have more risks.

Naris Sathapholdeja, the head of TMB Analytics, said the net interest margin (NIM) of the Thai banking system was at 2.75 per cent  at the end of the third quarter, compared to 1.93 per cent in Malaysia, 1.88 per cent in Singapore and 2.01 per cent in South Korea.

Part of the issue is that Thai banks have loaned more clean loans (no collateral required).

Among large banks, Siam Commercial Bank has the highest NIM rate at 3.65 per cent , followed by Krungsri 3.47, Kasikornbank 3.31, Krung Thai Bank 3.08 and Bangkok Bank 2.26 per cent.