Bank of Thailand to Launch New Credit Guarantee Mechanism to Support SME Loans

• The Bank of Thailand (BoT) is preparing to establish a new credit guarantee mechanism to encourage commercial banks to extend more loans to SMEs. This initiative comes in response to the caution banks have exercised due to high credit risks.

• The funding for this project will come from the Financial Institutions Development Fund (FIDF), which is not part of the government's budget. This allows the initiative to be implemented quickly.

• The new mechanism aims to simplify access to loans for SMEs, helping to reduce the credit risks faced by banks in the event of bad debts.
• The focus will initially be on targeted industries, such as the five key industries outlined in the “Reinvent Thailand” initiative, as well as industries requiring adaptation.

Currently, the government is pushing forward various projects to help the economy navigate the crisis, following the five pillars of its policy. This includes the “Let's Go Halves Plus” scheme to increase purchasing power and a second pillar aimed at addressing household debt through the use of AMC to purchase bad debts for individuals owing less than 100,000 baht.

The next focus is on helping SMEs, which are a vital part of the economy, weather the current crisis.

Vitai Ratanakorn, Governor of the Bank of Thailand, acknowledged that the BoT is working in collaboration with three main agencies: the BoT, the Ministry of Finance, and the Thai Bankers’ Association, to find solutions for SMEs, following the measures to address bad debts for individuals owing less than 100,000 baht.

The next measure under discussion is a way to support SMEs in gaining access to credit, in hopes of driving economic growth.

Vitai highlighted the challenges faced by SMEs, particularly the current economic issue of “negative loans and high credit costs.”

One of the main reasons for negative loans is the high credit risk seen by financial institutions, which has led to caution in lending. The two main reasons for the high risks are:

1. Financial Cost – This is usually not a significant issue, as it represents only a small proportion of the total risk.
2. Credit Cost – This is the primary problem currently. High credit costs could lead to the loss of principal. While general loan credit costs might be around 5%, SMEs could face credit costs of 10-20%.

Currently, there are existing credit guarantee mechanisms to reduce lending risks, such as the Thai Credit Guarantee Corporation (TCG), which receives government compensation for part of the loan guarantees. The credit guarantee process is complex, and its procedures can make it difficult for BoT lenders and borrowers. Additionally, mechanisms through the National Credit Guarantee Agency (NaCGA) are not yet operational, as they are still in the process of being established.

Strengthening Agency Collaboration

Given these challenges, the BoT has decided to quickly introduce a new, simplified credit guarantee mechanism for SMEs to address negative loans and high credit costs directly.

“While this is still a concept, the measure does not yet have an official name, but the fundamental principle is to create a simplified version of the TCG’s credit guarantee mechanism, making it easier to use,” said Vitai.

The objectives of this initiative are as follows:

1. Reducing Credit Risk – Banks will be able to immediately know the extent of their guaranteed responsibility when lending, which will help reduce the credit cost.
2. Targeting Credit Costs Directly – The mechanism is designed to reduce credit costs directly, making it more effective than the current mechanisms.
3. Not Reducing the Risk of Non-Performing Loans (NPLs) but Minimising Damage – This mechanism will not prevent the creation of NPLs, but it will help reduce the damage or credit risk if a bad debt arises, as banks can use the mechanism to minimise losses.

Targeting 5 Key Industries

To ensure that the guarantee mechanism does not overlap with existing guarantees like those from TCG, this new measure will focus on clearly defined target industries. The BoT will begin by targeting the five core industries outlined in the “Reinvent Thailand” initiative, including: Agriculture and Food, Automotive, Smart Electronics, Healthcare and Medical, Tourism.

Additionally, the BoT is discussing the inclusion of more industries, such as retail, wholesale, and export sectors, with the Thai Chamber of Commerce and the Federation of Thai Industries (FTI).

“It’s important to note that this mechanism will not apply to every sector. It is not a blanket solution for all issues. Once the target industries are defined, specific loan targets will be set, such as loans up to 100 million baht for SMEs. While TCG currently guarantees loans up to 40 million baht, this measure might extend guarantees to loans of up to 100 million baht,” Vitai explained.

The goal is to help SMEs that are at risk but still competitive and adaptable, ensuring that loans circulate and ultimately drive economic activity.

Using FIDF Funds to Support SMEs

The funding for this initiative will come from remaining funds in the Financial Institutions Development Fund (FIDF), which is not part of the government budget. This allows for rapid implementation. If necessary, additional funds may be drawn from the FIDF in the future, based on contributions from financial institutions in 2026.

The specifics of how FIDF funds will be used to support SMEs are still under discussion, but this support will only be available during the current crisis. Once the measures conclude, no further assistance will be provided.

“The principle is to use the remaining FIDF funds, but we are still determining how much will be used. For example, if we use 10 billion baht, it could guarantee 20% of NPLs, which would amount to 50 billion baht in loans. If we use 20 billion baht, it could generate 100 billion baht in loans, speeding up the loan release process and reducing credit costs. The details are still being negotiated, but once the AMC process is complete, we will implement this measure,” Vitai said.

A Closer Approach to Problem-Solving

Vitai concluded by stating that the BoT’s mission is to move closer to the issues and society. Previously, the BoT’s focus was mainly on broader economic policies, particularly monetary policy and interest rates. Moving forward, however, the goal is to be more closely aligned with current issues, particularly with respect to SME support and the continuation of solutions for household bad debts addressed by the AMC.