Banks Under Scrutiny as Iran Conflict Impacts Loan Repayments
Banks are being closely monitored for their resilience following the economic repercussions of the US-Iran conflict, which has placed significant strain on businesses. In May, financial regulators mandated stress tests for banks to assess their capacity to withstand potential risks and shocks. Initial findings indicate a slight improvement compared to April figures, according to central bank governor Vitai Ratanakorn.
Lingering Middle East Tensions Affect Borrowers
The persistent conflicts in the Middle East are impacting both corporate and individual borrowers, diminishing the debt repayment capabilities of households and small and medium-sized enterprises (SMEs). “We are closely observing the transition of special mention (SM) loans into non-performing loans (NPLs), particularly within vulnerable household and SME segments,” stated Mr. Vitai. He added, “Should this trend exceed our projections, additional targeted interventions will be implemented.”
SM loans are categorized as those with overdue payments between 31 and 90 days, while NPLs are loans overdue by more than 90 days. Data reveals that for the first quarter, the SME NPL ratio climbed to 9.16% from 9.03% in the preceding quarter. Within this segment, the ratio of SM loans also saw a modest increase, rising to 15.8% from 15.6%.
SME Lending Contracts for Fourteenth Quarter
In parallel, SME lending experienced a 4% contraction in the first three months of the year, following a 3.9% decrease in the previous quarter. This marks the fifteenth consecutive quarter of shrinking SME loan offerings.
Central Bank Urges Continued Support for Vulnerable Groups
While the overall credit quality within the banking sector remains stable, the Monetary Policy Committee (MPC) has emphasized the continued need to monitor the debt repayment capacity of SMEs and vulnerable households. The committee has encouraged financial institutions to persist with targeted financial measures designed to assist these at-risk groups.
Don Nakornthab, secretary of the MPC, commented following the recent rate-setting meeting that SME NPLs remain at elevated levels and are on an upward trajectory. This is attributed to a decline in repayment capability among corporate borrowers, compounded by the ongoing contraction in loan provisions.
Large Businesses Adapt Better, SMEs Face Greater Challenges
Regarding the broader economic impact of the ongoing conflict, its severity has been less pronounced than initially anticipated by the central bank. Larger businesses have demonstrated a greater capacity for adaptation than expected. Mr. Don noted that major companies have successfully identified alternative sources for raw materials and adjusted their transportation logistics.
However, SMEs exhibit a lower adaptability compared to their larger counterparts. Even as tensions in the Gulf region have somewhat eased, SMEs are expected to continue facing adaptation limitations, further constrained by intense market competition. Mr. Don highlighted these ongoing challenges.
Household Spending Pressured by Income Growth and Costs
For many households, the situation is compounded by decelerating income growth and escalating living costs. This economic pressure is likely to weigh on private consumption once government relief measures are eventually phased out, according to the MPC.
Furthermore, the pass-through of costs by businesses requires careful monitoring, particularly amidst persistent elevated expenses. Medium-term inflation expectations also remain a point of concern, Mr. Don concluded.
