17 June 2021 • 7 minute read

Recent changes on the interest rate, debt repayments and how these would affect your financing in Thailand

Written by:Waranon Vanichprapa Pattadon Tejapaibul

On 10 April 2021, the Thai Government enacted The Emergency decree amending the Civil and Commercial Code B.E. 2564 (2021) (the “Emergency Decree”) to amend the Thai Civil and Commercial Code (CCC) (as amended, the "Amended CCC"). Recently, the Bank of Thailand (BOT) issued its notification no. SorKorSor. 9/2563 Re: Default interest calculation and application of debt repayment dated 9 October 2020 (the "New BOT's notification"). This new set of law has changed a Thai legal landscape on the interest calculation and the debt repayment.

What's News?

Interest Rates

1. New Rates under the Amended CCC where there is no specified rate

Before the recent amendment, the CCC allowed a lender to charge an interest and a default interest at the rate of 7.5% per annum if an interest were chargeable but the rate was not agreed in an agreement. The Amended CCC lowers the rate to be at 3% per annum where an interest rate is not specified and at 5% (2% on top of the 3% interest rate) per annum for a default interest rate. These rates are subject to a triennial review by the Ministry of Finance.

However, the laws mostly remain the same on the maximum interest rate and a default interest rate. If the parties agree on the rate of interest or default interest. Unless there is any specific regulation allow otherwise, the rates for both types of interest must not exceed 15%. Thus, the Amended CCC does not affect an agreement to which parties explicitly specify the rate of interest or the default interest.

2. New requirement on a default interest for a commercial bank

For commercial banks, the law permits them to charge an interest and a default interest at a rate in excess of 15% per annum. A commercial bank under the BOT's supervision, including a Thai representative office or branch of a foreign bank (the "Thai Commercial Bank"), is entitled to charge an interest at the rate publicly announced by it. The rate of interest up to 20% per annum is permitted to be charged by a foreign commercial bank.

A change has been made only on the default interest rate under the New BOT's notification. It captured that if a loan meets the following criteria:

a loan is an installment loan (including a bullet loan) or a revolving loan; and
the borrower is a retail or SME customer (collectively, the "Qualified Loan"), a Thai Commercial Bank cannot charge the default interest higher than 3% per annum on top of the normal interest rate specified in the relevant agreement.

3. Summary of the chargeable interest under Thai laws

The below table gives a summary on the interests currently chargeable under Thai laws. The new rates are highlighted in red.

Default interest only for a defaulted amount

CCC did not specify the base rate which was subject to a default interest. Thus, the base rate could be agreed freely between a lender and a borrower. If a borrower was in default, a Thai Commercial Bank would charge the default interest on the "entire outstanding amount" under an agreement regardless of whether the amount is due. This is an unusual practice for an international market where a lender would usually apply the default rate on the "unpaid amount" only.

However, this practice of charging a default interest over all outstanding amount can no longer be carried out and will be void under the new section 224/1 of the Amended CCC. A lender will be entitled to charge a default interest only on a due and unpaid amount. The parties cannot agree on any term which deviates from this provision. This would also be in line with the New BOT's Notification imposing the same requirement on the Qualified Loan.

Prerequisite for initiating the court case

For a Qualified Loan, the New BOT's Notification additionally requires a commercial bank to refrain from filing a case against the borrower to the court demanding a repayment of any amount except where such amount is overdue for 90 days. This regulation would diminish the right of a Thai Commercial Bank. However, how BOT will enforce this provision would yet remain to be seen.

Application of a partial repayment

Prior to the amendment, the parties to a facility agreement can agree to apply a repayment to any outstanding amount. Typically, a Thai Commercial Bank would follow the provision of the Asia Pacific Loan Market Association (APLMA) by applying the payment to the amounts in this order: (i) any fee and interest, (ii) principal and (ii) any other outstanding amount.

The New BOT's notification sets out the new rule on how a Thai Commercial Bank must apply a partial repayment in the following orders:

for an instalment loan (including a bullet loan), a repayment should be applied:

firstly, in a chronological order based on the due date of each outstanding amount; and
if there are two or more amounts due on the same date, the repayment will be apply to those amounts in the following orders; (a) any fee, (b) interest and (c) principal.

for a revolving loan, a repayment can be applied to all outstanding amounts of (a) any fee, (b) interest and (c) principal without the need to apply it chronologically.

The result would be that the provision regarding a partial payment under the loan agreement may need to be reviewed to reflect the chronological application of payment. This would include the application of prepayment in an inverse order which may no longer be allowed.

However, Parties may agree to apply the repayment differently if such alternative would provide a borrower with more benefit. This includes applying a repayment to outstanding principal and interest before an outstanding fee.

Failure to Comply?

The failure to comply with the new rules would cause the provisions conflicting with those rules to be invalid and unenforceable.

In addition, the Thai Commercial Bank's failure to comply with the New BOT's Notification would cause such bank to be subject to a fine up to THB500,000 and an additional fine up to THB5,000 per day so long as the bank is still in breach.

Effective Date

All changes have already come to effect except for the provisions relating to the "Application of a partial repayment" which will come into effect on 1 July 2021.

Grandfather Rights

The Amended CCC

Whether or not an agreement is entered into on or before the effective date of the Emergency Decree (11 April 2021), it would be subject to the Amended CCC. However, any interest or default interest incurred before such effective date will be grandfathered. The Amended CCC will apply to only interest or default interests incurred from 11 April 2021 onwards.

The New BOT's Notification

The requirements under the New BOT's Notification (for the provisions relating to the "New requirement on a default interest for a commercial bank", "Default interest only for a defaulted amount" and "Prerequisite for initiating the court case", effective on 1 April 2021 and the provisions relating to the "Application of a partial repayment", effective on 1 July 2021) would have an effect on all agreements regardless of whether they are entered into prior to the relevant effective dates. The only exemption is granted to only syndicated facility agreement which include one or more foreign lenders and entered into prior to the respective effective date.