The Covid-19 pandemic is expected to be a factor undermining the economy for a long time, though banks can play their part in helping to cushion the blow.
The Centre for COVID-19 Situation Administration (CCSA) will meet today to decide whether lockdowns and restrictions on activities to curb transmissions will be extended, as the current extension ends on Wednesday.
The government hinted last week that without lockdown and restriction measures, new infection cases could reach 60,000 a day with 500 daily fatalities in the next month.
So a further extension is expected and some impact on economy and businesses, particularly small and mid-sized ones, is unavoidable.
The situation is not beyond expectation as the rate of Covid-19 vaccination in the country is still low and the effectiveness of measures to curb transmissions also low. The CCSA admitted the existing measures are only 20% effective.
The Bank of Thailand has foreseen the problem. The bank last week came up with a new approach to rescue businesses hard hit by the prolonged impact of the pandemic.
The central bank wants commercial banks to focus on long-term debt solutions for clients instead of the short-term approach they tend to take now.
The long-term solutions are that the banks have to shave off some percentage of total debts owed by clients, known as a "haircut". The central bank requires creditors to cut clients' installment and interest payments.
According to the central bank, the effects of the Covid-19 pandemic are expected to be prolonged and some businesses will need a few more years to fully recover, particularly tourism-related ones such as hotels and resorts.
The Bank of Thailand's proposal is reasonable because most current relief measures offered by commercial banks are short-term such as temporary halts to loan repayments and extensions of the payment period.
After the relief period ends, debtors are still obliged to repay the full amount of debt when their income is still limited and the business environment far from robust. Without help, many debtors can go bankrupt and workers will lose their jobs.
However, a debt haircut would be a bitter pill for creditors as it can lead to losses and instability in the banking system, which must concern the central bank.
When taking the positive performance of the banking sector into account, however, banks have no excuse not to support the proposed scheme.
In the second quarter of this year, 10 local commercial banks posted a combined net profit of 51.1 billion baht, up 69.5% on the same period last year. For the first half of this year, the banks made a net profit of 97.5 billion baht, up 26.9% year-on-year.
Although the results were substantially attributed to cost reductions and efficient risk management, this thriving sector stands in contrast to several others hard-hit by the crisis. That's why banks should respond positively to the central bank's proposal in offering direct aid and converting some debt into grants to support clients and the economy through the pandemic. Banks will also benefit if their customers survive.
However, long-term debt restructuring must be done prudently to ensure that moral hazards do not occur. Banks which support the proposed scheme deserve sufficient incentives, including tax incentives, as they would be playing an important role to support the economic recovery.
