Thursday, October 22, 2020

BOT plans credit-term limit as SMEs hit by big firms’ delaying tactics

Sep 26. 2020
Experts brief the press about plans to introduce a mandatory credit term with financial penalties. From left, Thita Phakanont, Sauwanee Thairungroj, Chitkasem Pornprapunt.
Experts brief the press about plans to introduce a mandatory credit term with financial penalties. From left, Thita Phakanont, Sauwanee Thairungroj, Chitkasem Pornprapunt.
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By The Nation

The central bank plans to punish large firms who delay paying their debts to small companies.

The move comes after a study showed that big corporates are taking advantage of small and medium-sized enterprises (SMEs) by delaying payments, leading to a credit crunch for SMEs, said Sauwanee Thairungroj, adviser to the University of Thai Chamber of Commerce.

Cash payment represents only 4 per cent of transactions among businesses, most of whom rely on credit. Usually, businesses settle their bills within 30 to 45 days, but during the Covid-19 outbreak, big corporates have delayed payment by up to four months or 120 days, she said.

The delaying tactics have cost SMEs dearly, with their liquidity dropping by 38.5 per cent, debt rising by 27.6 per cent and debt payment ability falling by 16.2 per cent.

The response from small firms has been mixed, with 40.6 per cent asking for partial up-front payment, 35.5 per cent offering discounts, 15 per cent seeking credit from loan sharks and the rest applying for loans from financial institutions.

Thita Phakanont, senior economist at the Bank of Thailand (BOT), noted that other countries have created solutions to problems caused by extending credit terms.

Britain requires payment within 60 days, after which debtors have their rights to do business with state agencies revoked. Australia requires payment in 30 days, after which debtor-firms can have their certification revoked. The European Union sets a 60-day credit term, with fines or interest-rate penalties for violators. China sets a deadline of 30 to 60 days, after which debtors must pay interest equivalent to the rate on a one-year loan.

In Thailand, a possible credit term of 30 to 45 days is being studied by the central bank, National Economic and Social Development Council (NESDC) and Thai Chamber of Commerce. Those who fail to meet the deadline could be subject to a fine and interest rate charge. The study will also explore whether the Stock Exchange of Thailand should disclose names of listed firms which delay debt payment.

Incentives may be also needed for firms to stick to the set credit term, Thita added.

Senior BOT director Chitkasem Pornprapunt said the results of the study would be proposed to Cabinet for approval. If given the green light, central bank may introduce a compulsory credit term by December this year. The rule would be applied to big companies first – manufacturers with at least Bt500 million annual revenue and service-sector firms with at least Bt300 million yearly revenue.

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