Not 1997 Again: Thai Banks' Bad Loans Are a Chronic Wound That Is Hard to Clear

 

Fitch expects bad loans to stay at 3% to 4% as clearing stalls, debt buyers retreat and banks pay dividends instead of lending to riskier borrowers.

 

Thailand's banks are not heading for another 1997. They remain profitable and well capitalised. But their non-performing loans (NPLs) have stopped falling, and the cause is structural: weak growth, a stalled market for distressed debt and cautious lending reinforce one another.

 

The result is that the borrowers who most need credit have the least access to it. Fitch Ratings expects NPLs to hover between 3% and 4% of total loans over the next one to two years.

 

Its presentation showed Thai NPLs holding at roughly 3.5% in recent years, while the average for emerging Asia-Pacific banks has fallen below that level since 2023.

 

With economic growth forecast at a sluggish 1.4% to 2.5%, there is no macroeconomic momentum to help distressed borrowers recover on their own.

 

"In terms of the regional picture, it is clear that Thailand is not able to resolve NPL issues as well as its peers... NPLs are likely to remain quite high over the near term," said Parson Singha, head of Thailand financial institutions at Fitch Ratings Thailand.

 

 

Why this is not 1997

The weakness today is of a different kind. In 1997, a liquidity crunch crippled domestic institutions and triggered a regional financial crisis. Now the problem is slow healing of asset quality, which strong balance sheets can absorb.

 

Bank of Thailand (BOT) data for the first half of 2026 show total capital at 20.0% of risk-weighted assets and Common Equity Tier 1 (CET1) capital at 17.3%. Both dipped slightly from the first quarter's 20.1% and 17.4%, but remain robust.

 

 

The Liquidity Coverage Ratio eased to 197.4% from 210.2%, still comfortably above regulatory minimums. Special mention loans, an early warning of stress, fell to 6.78% from 7.00%, helped by proactive debt restructuring that the central bank continues to encourage.

 

Fitch's stress test points the same way. Assuming oil at US$100 a barrel in 2026, against a base case of US$70, it found that Thailand's NPL ratio and credit costs would move only modestly and that capital would barely change.

 

Given these buffers, Fitch sees no need for a government bailout or a national asset management company (AMC). Profitability has held up despite narrower margins.

 

The net interest margin (NIM), the gap between interest earned on loans and paid on deposits, compressed to 2.38% from 2.77% a year earlier.

 

The BOT attributed the squeeze to past rate cuts, debt relief for vulnerable borrowers and precautionary provisions against Middle East geopolitical risks. Stronger non-interest income and lower provisioning cushioned earnings. The BOT's headline NPL ratio was 2.82% at the end of June, down from 2.85% in March.

 

The central bank itself cautions that this figure flatters the picture, because banks have been managing problem loans through debt sales, write-offs and extensive restructuring.

 

New bad debt is still arriving: about 110 billion baht of loans migrated into NPL status in the second quarter alone, equivalent to roughly a fifth of the outstanding stock of 534.8 billion baht.

 

 

Resolution has stalled

The main challenge is the pace of clean-up. NPLs at commercial banks rose by 85 billion baht during the 2020-21 pandemic. In the three years since, they have fallen by only 33 billion baht, or about two-fifths of the increase.

 

"In the three years since then, the level of NPLs has fallen by 33 billion baht... fundamentally, one of the key reasons why credit quality remains weak," Parson said. "Over the next one to two years, NPLs will likely remain around 3% to 4% because there are no immediate catalysts driving them down."

 

The exit route is also narrowing. Banks have historically sold bad loans to private AMCs to clean up their balance sheets. But those AMCs have curtailed purchases as recovery rates weaken in a sluggish economy, and Fitch's presentation showed their returns on assets falling towards zero.

 

Distressed debt therefore stays on bank balance sheets for longer.

 

 

Banks choose caution over credit growth

Lenders are responding rationally to the risk, but the response deepens the problem. Fitch data show SMEs carried the highest NPL ratio in June 2026, at about 9%, against about 3% for retail borrowers and about 1% for corporates.

 

Banks have shifted accordingly. Fitch notes that long-term lending growth slowed from a compound annual rate of 10% in 2010-15 to 4% in 2015-20 and 1% in 2020-25.

 

The latest BOT data show the same pattern.

 

Bank lending grew 2.0% year on year in the second quarter, up from 0.2% in the first, but the rise was driven by large corporates seeking working capital to absorb higher energy and raw material costs. That is borrowing out of necessity rather than a sign of renewed risk appetite.

 

Meanwhile, SME loans fell 4.6%, the 16th consecutive quarterly contraction. Instead of lending to riskier borrowers, banks are returning capital to shareholders.

 

"The Thai economy is recovering very slowly compared to everyone else... Instead of taking on more risk, banks are choosing to increase dividends and return excess cash to investors," Parson said.

 

 

A K-shaped recovery leaves small firms behind

This lending pattern mirrors the shape of the economy. Dr Prasarn Trairatvorakul, chairman of the Thai Bond Market Association (ThaiBMA) and of the Thailand Capital Market Development Committee, and a former BOT governor, described a stark "K-shaped" recovery.

 

Large, export-oriented companies tied to global supply chains are thriving, while low-income households and SMEs struggle under household debt equivalent to 85.2%-86.7% of GDP.

 

The two problems are linked.

 

The lower arm of the K is where bad debt is concentrated, and it is also where credit is being withdrawn. Without new financing, weak borrowers have fewer ways to recover, which sustains the NPLs that make banks cautious.

 

"What is most concerning is that growth is uneven; the lower arm of the K remains weak," Dr Prasarn said. "Financial and fiscal policy must first maintain stability and confidence and then address structural problems. Short-term relief measures lack sustainability; we cannot expect them to solve structural issues."

 

 

Policy relief and emerging BNPL risks

Authorities have deployed targeted schemes. The flagship Clear Debt, Move Forward initiative, launched on 5 January 2026, covers 2.36 million small accounts more than 90 days delinquent, capped at 100,000 baht each and totalling 62.4 billion baht.

 

Debt is transferred to Sukhumvit Asset Management (SAM) and Ari-AMC, with principal write-downs, interest waivers and a three-year repayment window.

 

By late August, 158,188 accounts had been restructured, 79% of the initial 2026 target of roughly 200,000. For businesses, the Portfolio Guarantee Scheme (PGS) has approved 65 billion baht in credit guarantees against an 80-billion-baht ceiling.

 

A separate 100-billion-baht soft-loan facility through the Government Savings Bank (GSB) has drawn down 51 billion baht. A new risk is building at the margin.

 

The central bank is monitoring the rapid rise of Buy Now, Pay Later (BNPL) schemes, popular among younger and lower-income consumers. BNPL debt grew from 6.8 billion baht in 2021 to 40.7 billion baht in 2025 across 6.3 million accounts, a compound annual growth rate of 56%, prompting plans for stricter supervisory guidelines.

 

 

Strain beyond the banks: the corporate bond market

Pressure is also emerging in the corporate bond market, which has grown from 500 billion baht (12% of GDP) during the 1997 crisis to more than 18 trillion baht (96% of GDP) today. High interest rates and sluggish growth have hit high-yield and property issuers hardest.

 

"We have seen increased stress in certain pockets of the market, particularly in the high-yield and real estate sectors... The flight to quality is becoming more pronounced. Rigorous credit analysis is essential to rebuilding and sustaining trust," Dr Prasarn said.

 

ThaiBMA data show defaults in the first quarter of 2026 from four issuers totalling 8.98 billion baht, largely among non-rated firms.

 

Somjin Sornpaisarn, a former ThaiBMA managing director, warned that with growth below 2%, default and repayment pressures on smaller, unrated issuers will stay elevated through 2026.

 

The wider market looks more resilient.

 

Ariya Tiranaprakit, ThaiBMA's managing director, projected 2026 corporate bond issuance at 880-900 billion baht, broadly in line with last year. She attributed this to low interest rates, continued capital expenditure by large companies and commercial bank refinancing needs.

 

The stress is concentrated at the bottom of the credit spectrum, mirroring the divide in bank lending. Dr Prasarn also noted that Thailand's ESG bond market has reached 1 trillion baht and urged regulators and credit rating agencies to tighten oversight against "greenwashing".

 

Global pressures add to the strain.

 

Win Phromphaet, executive chairman of Kasikorn Asset Management, pointed to US federal debt of US$43 trillion, which keeps global yields high, and to heavy bond sales by technology firms financing artificial intelligence.

 

On climate, he said economic losses to Thai companies could reach US$11 billion by 2050 and advocated an "Ice Cream Strategy" of financing carbon-heavy companies with credible transition plans.

 

"You cannot just invest in low-carbon companies... Our job is to help cool down high emitters that have solid transition plans in place," Win said.

 

 

What comes next

Analysts and officials point to three priorities. The first is to clear old bad debts faster by speeding up Clear Debt, Move Forward and reviving the market for distressed loans, without encouraging borrowers to expect rescues.

 

The second is to replace blanket handouts with support that is targeted, temporary and transformative. The third is to enforce stricter credit checks and tougher rules against greenwashing to protect trust in the bond market.

 

The central problem remains. Banks can absorb their bad loans, but they are doing so by lending less to the borrowers who most need credit in an economy growing too slowly to fix the problem on its own. Until growth reaches the lower arm of the K, the wound is unlikely to heal.