03 July, 2008
Interest Rates in Thailand
Recently, the Government Savings Bank announced on June 30th a new mortgage product for its members. Interest rates start at 3.5% for the first year and 5% in the second. Siam Commercial Bank, a private Thai bank charges roughly 7.32% for its good customers. This brings up two important questions:
1. How can the government bank charge nearly half the rate of its non-government competitors?
2. Why are most Microfinance Institutions (MFIs) charging rates higher than both of these?
Question #1.
First, like private banks, government banks are accountable to its shareholders. In the case of the GSB, it is the Ministry of Finance. Government policy and programs can significantly affect its operations. In many ways, this is good because the government can assure that certain groups of people have access to credit when they wouldn't otherwise have. However; in this case, the loan is open to anyone - rich or poor. The problem with this is that this kind of policy could potentially harm the long-term growth of the bank.
Question #2
It’s important to understand the difference between “secured” and “unsecured” loans. Housing loans are “secured” loans. In order to get a mortgage, you must provide banks with your housing documents. The house is used a collateral and, in the event that you do not repay your loan, the bank keeps your house. As a result, the loan is “secured” because the risk for the bank is minimized.
An “unsecured” loan is a loan that does not have collateral. A good example is a credit card loan. If the borrower does not repay the loan, the lender loses a lot of money. These kinds of loans are a lot riskier and interest rates are considerably higher.
In micro-credit, nearly all loans are some form of unsecured loans. This is primarily because poorer people often have nothing to offer as collateral. Because they have no collateral, most banks refuse their loan applications. These are the people who most MFIs try to help - especially ones with good income-generating plans.
In Thailand, most MFIs charge an interest rate of 10-20%. If we compare this to the posted credit card interest rates found at the Bank of Thailand, we discover that loans from MFIs are actually LOWER than the banks. Thailand is likely one of a few, if not the only, country where this exists.
1. How can the government bank charge nearly half the rate of its non-government competitors?
2. Why are most Microfinance Institutions (MFIs) charging rates higher than both of these?
Question #1.
First, like private banks, government banks are accountable to its shareholders. In the case of the GSB, it is the Ministry of Finance. Government policy and programs can significantly affect its operations. In many ways, this is good because the government can assure that certain groups of people have access to credit when they wouldn't otherwise have. However; in this case, the loan is open to anyone - rich or poor. The problem with this is that this kind of policy could potentially harm the long-term growth of the bank.
Question #2
It’s important to understand the difference between “secured” and “unsecured” loans. Housing loans are “secured” loans. In order to get a mortgage, you must provide banks with your housing documents. The house is used a collateral and, in the event that you do not repay your loan, the bank keeps your house. As a result, the loan is “secured” because the risk for the bank is minimized.
An “unsecured” loan is a loan that does not have collateral. A good example is a credit card loan. If the borrower does not repay the loan, the lender loses a lot of money. These kinds of loans are a lot riskier and interest rates are considerably higher.
In micro-credit, nearly all loans are some form of unsecured loans. This is primarily because poorer people often have nothing to offer as collateral. Because they have no collateral, most banks refuse their loan applications. These are the people who most MFIs try to help - especially ones with good income-generating plans.
In Thailand, most MFIs charge an interest rate of 10-20%. If we compare this to the posted credit card interest rates found at the Bank of Thailand, we discover that loans from MFIs are actually LOWER than the banks. Thailand is likely one of a few, if not the only, country where this exists.
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