Thursday, 23 March 2017: 09:20
Informal credit funds with exorbitant rates of interest seem to be the last resort for the poor in many developing countries. Even if the rates are much higher than interest rate ceilings, in the case of Thailand there has been an attempt, both by the Bank of Thailand and the Thai government, to regulate this practice and ensure poor people are not taken advantage of. However, in reality, informal credit lenders can freely set up these extortionate interest rates due to the fact that legal enforcement is not practical in terms of punishment of those lenders. Despite widespread interest in the determinants of the informal interest rates, it remains a largely unexplored area. This study investigates whether some characteristics of both the borrowers and the loans can be related to informal interest rates, enabling the latter to be classified into particular categories. The ordered logistic regression is used to do data analysis. The investigation into personal indebtedness situations was based on the information collected by a questionnaire survey presented to a sampled population of 694 participants from four provinces (including Bangkok, Nonthaburi, Phathum Thani, and Samut Prakan) where there was the highest number of these kinds of loans, compared to other regions of Thailand in 2013. In this study, debt-to-income ratio (DTI) is used to measure an individual’s ability to manage monthly payments and repay debts. The results suggest that DTI, and the level of lenders' influence over the borrower in order to obtain a loan, highly correlate with the informal interest rates applied. Familiarity between lenders and borrowers at a high level is associated with the rates. From the analysis of the amount of loans, stable income, and income level of borrowers, it was found that those factors have no linkage with the rates. This group of people have faced limitations in accessing low-cost funds because they lack collateral, guarantors, and also have high DTI. The short-term solution is that the Thai government should transition informal debt to formal debt through financial institutional channels. Creation of new financial loan products, for example, could offer small loans with longer maturity payments. The long-term solution is to launch community cooperatives so as to build disciplined saving and financial stability for these people.