Commercial lenders' bad loans are showing signs of improvement this year after peaking in the third quarter last year, says a senior official at the Bank of Thailand.
The industry's non-performing loans (NPLs) should continue to fall at a gradual pace this year from 2.91% during the three months to December, the first decline in several years from 2.97% in the preceding three months, said Daranee Saeju, senior director of the financial institution policy group at the central bank.
Falling special mention (SM) loans -- those between one and three months overdue -- is an indicator of future NPL declines.
The SM loan ratio fell to 2.55% in the fourth quarter last year from 2.27% in the third quarter.
The lower soured loans for commercial lenders came earlier than the central bank's forecast, which saw NPLs peaking towards the end of 2017.
The reduction in both NPL and SM loan ratios happened across loan types, comprising corporate, small and medium-sized enterprise (SME), and consumer loans.
NPLs are expected to level off before gradually declining this year, she said.
For the October-to-December quarter, commercial banks' bad loan ratio for large corporations fell from 1.69% in the previous three months to 1.75%, SMEs down to 4.37% from 4.63% and retail down to 2.68% from 2.74%.
Among retail loans, mortgages were the segment where NPL ratios continued to climb higher to 3.23% at the end-2017 from 3.26% in the previous quarter. The increase contributed to housing loans' teaser rate lapse.
Despite the improving NPLs, commercial banks are expected to continue setting aside larger loan-loss buffers this year to comply with their prudential risk management and the adoption of the new financial accounting standard (International Financial Reporting Standard 9), which will be effective in January 2019, she said.
Some financial institutions, led by large banks, have aggressively put aside reserves for credit losses to comply with the new accounting standard and the loan loss reserve of the banking sector is expected to return to normal levels in 2019.
Ms Daranee said higher provisions and lower fee-based income, triggered by the implementation of PromptPay, will put pressure on the profitability of the sector this year.
Fee income represents 30% of the industry's total revenue, of which 3.6% was contributed by the money transfer service.
PromptPay's consumer-to-consumer (C2C) service did not deal a heavy blow on the fee-based income of the banking sector last year due to the small number of transactions, but the magnitude of the impact will be larger this year, in line with rising PromptPay transactions.
PromptPay C2C transactions have continued to show positive growth, representing around 15-16% of total money transfer by individual customers.
In response, banks are in search of new businesses to expand customer bases through partnership models to maintain profitability. E-marketplace platforms is one such service for which banks are receiving positive feedback.
