Apisak pressures banks on spreads

Small businesses pay much higher interest

Finance Minister Apisak Tantivorawong is calling on commercial banks to narrow their interest spreads, saying the interest gap between large and small businesses is too large.

Governments since the 1997 financial crisis have allowed banks to enjoy large interest margins to help them survive, but the gap remains wide even though the sector’s financial position is stronger now, he said.

“Amid economic hardship, we allow financial institutions to have a large interest gap, comparing it to a heart that pumps blood throughout the body,” Mr Apisak said. “Once our heart is strong, financial institutions must tackle the issue [the interest gap] to create a level playing field.”

Commercial banks are charging large companies annual interest of just 1%, while imposing 7-8% for small businesses and 11-12% for credit cards, he said.

“Commercial banks say the pricing [interest rate] depends on risk,” he said, “but the question is whether the risk between big companies that are charged interest of 1% and small ones that pay 7-8% is so different. I think it should not be like that.”

The government is seeking ways to throw a lifeline to cash-starved small and medium-sized enterprise (SME) operators, which have taken a hit from the still-fragile economy. Commercial banks are reluctant to lend to them or even charge them high rates for fear that the loans will turn sour.

On the other hand, banks must offer competitive interest rates to large firms, which are resilient against the uneven economic recovery and have many options for raising funds, including bond issuance.

Commercial banks’ net interest margin — a key gauge of lending profitability — was in a wide range from 2% to 5% for the three months to March.

Mr Apisak said financial institutions must review the issue.

Risk is the main factor that determines pricing, but it should not be overdone, he said, adding that SMEs can hardly be expected to survive if the wide interest gap prevails.

Even so, he said the government would not step in to force financial institutions to cut interest rates for small borrowers.

To address the problems of poverty and inequality, the economy must expand through big projects such as the Eastern Economic Corridor to drive economic growth, Mr Apisak said.

Bank of Thailand governor Veerathai Santiprabhob said wide interest spreads are a problem that has “lingered for a long time and we’re trying to solve it step-by-step”.

The lower cost for money transfers offered by PromptPay under the national e-payment scheme should help bring down the financial costs of small businesses, he said.

Predee Daochai, chairman of the Thai Bankers’ Association and president of Kasikornbank, said interest spreads are largely dictated by the market mechanism, with factors including local and global policy rates, business competition, and cost management at each bank.

Banks set their interest rates according to the Bank of Thailand’s policy rate, which is expected to be kept unchanged at 1.5% this year. The US Federal Reserve’s policy rate, which is expected to rise twice during the remainder of 2017, is another key influence on local finance costs.

“Higher competition in both deposits and loans will automatically pressure banks to adjust spread,” Mr Predee said. “The current liquidity surplus of the banking sector will decline from the second quarter, due to the positive momentum of loan demand, and it will help narrow interest spread to be in line with the market mechanism.”

Anuwat Luengtaweekul, chief financial officer of Thanachart Bank, said the interest spread of the banking industry is 2% on average, which is in the middle of the pack compared with other countries.

There are several formulas for spread calculation, he said, adding that some countries convey a lower spread because they exclude fees charged.