New Rule on Calculation of Interest for Default Payments and Sequence of Repayment
A default interest rate is the interest rate applied to a loan or other financial obligations when the borrower fails to make the required payments on time. Default interest rates are typically higher than the interest rate that was agreed upon at the time the loan was made and they are intended to compensate the lender for the increased risk and inconvenience of having to deal with a delinquent borrower. Some lenders may not clearly disclose the default interest rate applied to a loan or credit facility agreement or they may not clearly explain the circumstances under which the default interest rate will be triggered. This can make it difficult for borrowers to understand the terms of their loans and to anticipate the potential consequences of falling behind on payments.
In 2020, the Bank of Thailand (“BoT”) issued Notification No. SorKorSor2. Re: Calculation of Interest on Default Payments and Sequence of Repayment to charge default interest that does not create too much burden to debtors who struggling with the financial situation to be in the possibility that debtors will be able to settle the debt in which it shall not accelerating the incurrence of non-performing loans (Non-Performing Loans: NPL), reflecting actual cost, does not cause debtors to lose financial discipline, supporting the process of debt restructuring negotiations, providing economic equity and also allowing debts write off to reduce the principal debt so that the debtors have a better chance to completely settle their outstanding debt.
However, in order to create equity among all groups of debtors, the BoT has therefore amended the said notification by issuing the Notification of BoT No. SorKorSor2. [unidentified number]/2566 Re: Calculation of Interest on Default Payments and Sequence of Repayment (“Notification”) which shall be enforced and come into effect from 1 April 2023 onward and the notification mentioned above shall be repealed. This Notification expands the scope of default interest rates to cover all groups of debtors and expands the scope of financial service providers to include credit card operators.
This Notification applies to certain financial service providers as follows:
Financial institutions according to the financial institutions’ business law;
Companies within a financial business group with the business of credit card, personal loan, nano finance, leasing, hire-purchase and asset management company;
Specialized financial institutions according to the financial institutions’ business law;
Credit card operators, personal loan operators and nano finance operators according to the Notification of the Ministry of Finance Re: Business which requires authorization under Clause 5 of the Announcement of the National Executive Council No.58; and
Asset management companies according to the asset management company law.
(collectively as “Financial Service Providers”)
Moreover, this Notification specifies various criteria as briefly summarized below:
Default Interest Rate
Regarding installment loans and revolving loans, Financial Service Providers can charge the default interest rate higher than the rate specified in the contract but not more than 3% per annum, relevant factors should be considered appropriately. For loans with floating interest rates, the interest rate on the date of default is used as a reference rate.
However, loans that have a specific maximum rate of interest, fines, service charges, and any other fees shall comply with its specific law.
Default Interest Calculation Base
Regarding installment loans, Financial Service Providers shall calculate the default interest based on the principal of the outstanding installments in each installment until at least the date the court accepts the lawsuit on this matter. To file a lawsuit against debtors to the court, debtors must be in arrears for more than 90 days from the due date.
Regarding revolving loans, Financial Service Providers shall calculate the default interest based on the full amount of the outstanding principal.
Default Interest Charged Grace Period
Financial Service Provider shall specify a grace period to not charge default interest in the event that the debtor may have force majeure that causes the debtor to be ineligible to pay the debt on time.
Sequence of Repayment
Regarding installment loans, upon receiving debt repayment, Financial Service Providers shall write off the debt incurred from fees, interest, and principal of the debt of the longest overdue installment first, and then write off the next longest overdue installment respectively.
Furthermore, this Notification also specifies the detail on notifying the debtors, sale or transfer of debt to other Financial Service Providers, Loans under foreign law, and Financial Service Provider’s foreign branches and companies in the financial business groups established in foreign countries.