Here's how Thailand's new guarantee law will hurt banks

Hello, rocketing operating cost.

Thailand passed a new guarantee law in November 2014, to be effective from February 2015, which has spurred criticism and raised concerns among legal professionals and within the banking industry.

According to a research note from Nomura, the new law sets obligation limitation for guarantors and mortgagors and posts stricter rules on the enforcement of guarantee contracts and the foreclosure of mortgaged properties.

While this is positive for guarantors and mortgagors as it creates fairness for them, and Nomura believes this is the right direction, banks as lenders will be negatively impacted.

However, Nomura also noted that the impact should be manageable. It said the immediate impact would be higher operating cost and lengthening of credit underwriting/approval process, but this is not a major concern.

Here's more from Nomura:

The longer-term and more disturbing impact relates to the loan collection and debt restructuring process once the debtors default.

The new law makes it more difficult for lenders to pursue guarantors and debtors simultaneously and prevent lenders from proceeding with debt restructuring without guarantors’ consent.

The Thai Banker’s Association has proposed the amendment of the law on these aspects, but this remains a wild card.

Nonetheless, in a worstcase scenario where the law is not amended further, we believe Thai banks will still be able to adjust and are in the process of preparing for the change.