BOT warns trade war dampens investment as bank loans contract for third consecutive quarter

The Bank of Thailand (BOT) released its overview of commercial banks’ performance in Q1 2025, noting that while the banking system remains stable with high liquidity and reserves, concerns are growing due to economic vulnerabilities and the impact of the ongoing trade war. These factors have contributed to a continued contraction in overall bank loans and persistently high levels of non-performing loans (NPLs).

Suwannee Jatsadasak, Assistant Governor of the Financial Institution Supervision Group at the BOT, stated that although the banking system’s financial stability remains intact, close attention is needed on tightening financial conditions and the debt-servicing capacity of businesses and households—especially vulnerable groups potentially affected further by global trade policies.

Bank loans shrank for the third consecutive quarter in Q1 2025, continuing the decline that began in Q3 2024. This was mainly due to high loan repayments, though large business loans still expanded. The most significant contractions were seen in SME loans and consumer loans, reflecting elevated credit risks, she said.

Loans Contract for Third Straight Quarter

Overall, commercial bank loans declined by 1.3% in Q1, marking the third consecutive quarter of contraction. The trend is expected to continue into Q2 2025, said Suwannee, adding that the decline in loans is largely attributed to high repayment volumes.

Meanwhile, bond market fundraising also contracted. Several large firms, especially in utilities and energy sectors, issued bonds in Q1 to refinance commercial bank loans, contributing to the reduction in bank loan balances.

Large business loans grew by 1.5%, mainly from the real estate, financial, and industrial sectors. Exporters increased borrowing to accelerate imports ahead of new tariff measures.

On the other hand, loans in the utilities, energy, and telecommunications sectors contracted, partly because some borrowers issued bonds to repay bank loans, she added.

SME Loans Shrink Across All Sectors

The central bank reported that SME loans continued to contract across all sectors, notably a 5.5% decline in the commercial sector, partly due to banks tightening lending criteria. However, existing customers with good repayment histories and competitive potential continued to receive credit.

Consumer loans shrank overall by 2.2%, with continued declines in hire-purchase and credit card loans. This reflects cautious lending practices over the past 1-2 years and a recent slowdown in credit card spending after a peak in Q4 2024.

Housing loans and personal loans still grew but at slower rates, with notable slowdowns in loans for homes priced below 5 million baht.

Positive signs were seen in hire-purchase loans, supported by improved domestic car sales in Q1. Additionally, repossession of used cars declined, aided by relief measures that delayed repossession and stabilized used car prices.

When asked if banks have stopped lending, the BOT clarified that new loan disbursements remain high at 4.4 trillion baht in Q1, but repayments—particularly from large businesses—have surged, causing net loan balances to decline.

Rising Non-Performing Loans from SMEs and Retail Borrowers

Regarding loan quality, non-performing loans (NPLs) increased overall from 2.78% in the previous quarter to 2.9% this quarter. This is due to rising NPLs in some loan categories and contraction in others.

The BOT found that NPLs increased mainly in SME loans across nearly all sectors. Most large NPLs come from borrowers who have previously received assistance. Similarly, consumer loans such as housing loans also saw rising NPLs.

Focusing on housing loans below 5 million baht, the number of NPL accounts decreased, but the total debt amount increased, indicating that NPLs are concentrated in the higher-priced housing segment.

“We are mainly concerned about SME and retail loans. The upcoming 'You Fight, We Help' Phase 2 program will assist with debt resolution, but the key is also addressing income issues—how to restore household and business income, which is not easy,” said Suwannee.

For Stage 2 (SM or Special Mention) loans, overall quality has improved due to more cautious SME lending by commercial banks. However, consumer loans, mainly housing loans, saw an increase.

Debt Quality Outlook and Concerns

Looking ahead, loan quality may deteriorate due to ongoing uncertainties and unknown outcomes from trade negotiations. When asked if the BOT was worried, the answer was “yes,” with particular concern for retail and small SME borrowers, said Suwannee.

Despite cautious lending, if businesses or households demonstrate repayment ability, new loans may still be extended. Thus, reduced lending is not solely due to banks withholding credit. High uncertainty has also dampened business demand for large investments, reducing credit demand, she added.

BOT Orders Six Largest Banks to Conduct Stress Tests

The BOT acknowledged significant challenges, especially from trade war impacts. It is closely monitoring the situation and regularly consulting with financial institutions and businesses to adapt.

Due to trade war effects and tariff policies under U.S. President Trump, the BOT has instructed major banks to conduct stress tests. Some banks have many export clients potentially affected by these policies. The BOT expects impact assessments from these banks soon.

Meanwhile, the BOT is coordinating with the Ministry of Finance on the second phase of the “You Fight, We Help” program, expected to be finalized by mid to late June.

If the Ministry of Finance wants commercial banks to reduce profits to aid debtors, the BOT views the “You Fight, We Help” program as already impacting bank profits via reduced interest income and partial compensation within the program.

The BOT has tightened oversight to ensure banks assist debtors properly, whether through debt restructuring or this program, closely monitoring compliance with established criteria.

Bank Net Interest Margin (NIM) Not Excessively High

NIM for the banking system has declined in line with falling interest rates. Compared regionally, Thailand’s NIM is moderate at 2.8%, lower than Indonesia (4.6%), the Philippines (4%), and Vietnam (3.3%), but higher than Singapore (around 2%). This places Thailand at a mid-level within the region.

“NIM could decline further if it benefits borrowers through increased bank efficiency and competition. This is partly why the BOT has issued more virtual bank licenses—to encourage greater competition,” said Suwannee.

To reduce NIM further, competition and efficiency must improve, she said, adding that banks have been cutting operating costs steadily, especially various expenses.

Call Center Fraud Case and Regulatory Response

Regarding the recent arrest of bank managers and staff for illicitly opening accounts for call center fraud gangs, the BOT, working with the Anti-Money Laundering Office, has investigated and disciplined involved staff, with legal action underway.

The BOT is also working to identify vulnerabilities in such cases to develop stronger safeguards moving forward.