Thai Banks Face Four Consecutive Quarters of Loan Decline Amid Economic Fragility
High-income households curb spending as commercial banks report continued credit contraction despite stable capital reserves
- Thailand's commercial banking sector has experienced four consecutive quarters of loan contraction, with a 0.9% decline in the second quarter of 2025, signaling ongoing economic fragility.
- The decline is driven by a combination of cautious bank lending, particularly to Small and Medium Enterprises (SMEs), and a "deleveraging" trend where businesses and consumers prioritize repaying debt accumulated during the COVID-19 crisis.
- SMEs are the most affected, facing a credit squeeze and contributing to a rise in business-sector non-performing loans (NPLs), which increased to 2.91% in Q2.
- A shift in consumer behavior, with higher-income households reducing spending and borrowing, has also contributed to the trend, as reflected in a 1.9% contraction in credit card loans.
Thailand's commercial banking sector is grappling with an unprecedented four-quarter streak of declining loan growth, raising concerns about mounting economic fragility despite the system's overall stability, the Bank of Thailand (BOT) has announced.
The central bank's latest quarterly report reveals that total loans from commercial banks and their subsidiaries contracted by 0.9% in the second quarter of 2025, an improvement from the 1.3% decline in the previous quarter but marking the fourth consecutive period of negative growth—a rare occurrence in the sector's recent history.
"We expect the banking system's loans to remain in negative territory for a while. This may be a period of gradual deleveraging from past accumulated debt," said Suwannee Jatsadasak, Assistant Governor of the BOT's Financial Institutions Policy Group.
SME Lending Remains Constrained
Small and medium enterprises (SMEs) continue to bear the brunt of the credit squeeze, with banks maintaining cautious lending practices and focusing primarily on existing clients with strong repayment histories and adequate collateral.
This approach has made it increasingly difficult for new businesses to access credit facilities.
Business loans overall contracted by 0.1%—a smaller decline than the previous quarter's 0.8% but still reflecting the ongoing negative trend. The contraction spans across all business sectors, with commercial banks remaining particularly wary of SME lending due to elevated credit risks.
Consumer Spending Patterns Shift
A notable development has emerged in consumer behaviour, with households earning more than 50,000 baht monthly demonstrating increased spending caution.
This trend is reflected in credit card loan contractions of 1.9%, primarily amongst higher-income cardholders.
"Debt repayment also reflects that businesses and high-income groups are becoming more cautious. It's not just the banks that are being careful, but businesses are also taking precautions," Suwannee explained.
The automotive sector shows mixed signals, with hire-purchase loans continuing to contract at 9.7%, albeit at a slower rate than previous quarters.
However, car dealers and manufacturers reported positive developments in Q2, with sales exceeding last year's quarterly average and fewer vehicle repossessions since Q1.
Legacy of COVID-19 Debt Burden
The current lending slowdown stems largely from debt accumulated during the 2020-2021 COVID-19 crisis, when GDP declined but loan usage remained high.
Businesses and individuals are now prioritising debt reduction and liquidity maintenance over new borrowing.
"This is what the BOT is most concerned about, especially for SMEs, as their loans continue to contract and non-performing loans are still increasing, albeit at a slower rate," the assistant governor noted.
Rising NPLs in Business Sector
Non-performing loans (NPLs) across the commercial banking system edged up to 2.91% in Q2 from 2.90% in the previous quarter, driven primarily by business loans.
SMEs that received multiple assistance rounds but failed to recover contributed significantly to this increase.
Conversely, consumer loan NPLs showed improvement across most categories, including mortgages, credit cards, personal loans, and hire-purchase agreements.
Large businesses with credit facilities exceeding 500 million baht saw increases in non-accrual loans, though this resulted from qualitative assessments of weaker 2024 financial performance rather than payment defaults.
Banking Performance and Policy Response
Despite lending challenges, overall commercial banking performance improved from the previous quarter, aided by seasonal dividend income.
However, net interest income declined due to lower rates and reduced loan volumes, causing the net interest margin to fall from 2.8% to 2.72%.
The BOT expects recent interest rate cuts by the Monetary Policy Committee to benefit floating-rate borrowers, particularly SMEs, as approximately 70% of SME debt carries variable rates. However, officials emphasise that credit access remains a more significant challenge than interest rates for new borrowers.
Debt Assistance Programmes Expand
Under the Responsible Lending framework, debtors receiving assistance have reached 2.54 million accounts in the first half of 2025, representing approximately 1.50 trillion baht in debt still under support measures.
The "You Fight, We Help" Phase 2 initiative, launched in July, has attracted 3.7 million participants with total debt of 1.2 trillion baht.
Following eligibility assessments, 740,000 debtors—representing 20% of eligible participants—have been approved for assistance measures covering 530 billion baht in debt.
As Thailand's banking sector navigates these challenges, the BOT continues monitoring potential impacts from import competition and possible changes to US tax policies that could affect exporters and supply chains.
