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chaiyapoon

Rural Interest Rates

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Respecting Mangoheads wish to keep his farming heading on topic;I have started this off.

Some of you have commented that 5% to 7% interest rates per month are high,and that is very true but when I returned to see my girlfriend this year I was shocked to find she had taken out a largish loan with one of the local rich old ladies at no less than 20% a month!!!!!(240% per year)!!!!!!!!!!

Needless to say I was wild.It cost me about the same price for a new motorcycle to settle the interest payments alone.No wonder she is a rich old lady.

Loansharking at 10% a month is common in the area.If you have assets they can hold farm or house papers etc;then loans are easily got.Mostly they are used to finance things like sending a family member to work overseas or buying a tractor or digging a reservoir etc,and seem to hold no fear to the thais.

My girlfriends sister has 20,000baht on loan at 10% at the moment and admits it is unlikely that she can pay this back until her daughter marries and she is only 12!!!

Any of you have any stories to tell on this? Are the Thais crazy or just very desperate?

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Both crazy and desperate I think is the answer to your question Chai. Easy credit has always been a feature of Thailand for rich and poor alike, butt he difference is that the rich and middle class get their loans from banks and financial institutions and ordinary market rates, while the poor get their loans from informal, high interest loan sharks of the sort who gouged your girlfriend (assuming she's telling you the truth as 20 % per month is ultra-excessive!).

Of course the above is a generalisation and there are lots of poor farmers who've mortgaged their land with the Tor-Gor Sow (Agricultural and cooperatives Bank), which charges low interest rates. Trouble is there are lots of conditions on what you can do with the money and you can't get a loan in a hurry for emergencies or non-farming stuff (like sending your son/daughter to work abroad). So when a villager needs a large wad of cash in a hurry they revert to the sharks, who are only to happen to lend if they can get their hands on some nice juicy collateral like land documents. So, when the villager defaults (highly likely scenario at those extortionate rates), it's bye-bye land and your whark has just gained another nice piece of land that they can then use to go to a bank and borrow some money at 10 % p.a. Life's a bitch when your poor, uneducated and vulnerable to the many influences saying DEBT IS GOOD.

Have you noticed how everyone has a loan on reducing value assets like bikes, cars, TVs, DVDs, etc., but very few have loans for increasing assets, like their land? Education is the one exception, but research studies have shown that most of the loans divvied out by govt. supposedly to help "poor students" study further, have in fact been given out to the kids of wealthy families, because of of influence and connections. So the poor often end up mortgaging their land toa shark and losing everything so their kids can get past secondary school, while the rich enjoy student loans at really low interest rates. However, rich and poor alike, the default rate for these educational loans is said to be appalling and the govt. is now scaling back before the country goes bankrupt. Hidden debt, away from official figures is huge here, espcially in rural communities. The bubble is going to burst one of these days and it's not going to be a pretty sight when it does...................

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Are the Thais crazy or just very desperate?

They are both I'm afraid. Also I believe that they are ignorant about what the true rate should be.

When my wife was lending to a guy in her village (the headman actually) she asked me what the repayment would be at 5%- I was the one with a calculator - naturally I worked out 5% p.a. Both (lender and borrower) told me that I was wrong and that is not the way they do it in LOS. The calculation is monthly - I think they really believe this how banks, etc. calculate when they advertise a rate.

I advised both that this wrong but they wanted to go ahead with it.

This was a few years ago and the borrower has defaulted on the loan (it was to enable his daughter to buy a house in Pattaya). However, my wife has not taken any action (like taking over his property, but she holds the deeds). I have told her that he is to just pay the capital sum when he can and leave it at that.

There are others who have borrowed from her but I have not been involved.

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It is not only a rural rate - it happens in bkk too, as I found out first hand a few days ago.

I know a young thai lady, we met her in a restaurant we frequent, where she works. She was the first "Thai" we got to know after arriving here, and she has been helpful as a source of info. She also did some part time work for us.

She is the eldest child, so it seems a lot of responsibility falls on her. They have land and are building a house on one of the plots. The problem is the parents keep asking her to send more and more money and she simply cannot say no.

She had savings of about B30K which took her many years to save up from a very limited income. She went through her savings, then started borrowing money from friends, but always managed to pay it back - thanks to the extra money she was earning with us. I tried telling her to only send money when she had it and to tell the parents when she did not have money. I think she was too embarrassed to tell them that she did not have the money.

About 2 months ago she borrowed B20K from a "friend" at work at 10% per month. After regular expenses, she can barely afford the monthly interest of 2K per month let alone pay the principal or send any extra money for the house...

I think it finally dawned on her she cannot spend what she does not have. She has since been compelled to tell the parents and the house has been put on hold. However, she was still at a total loss as to how to extricate herself from the mess she is in - after all as a thai going from B30K credit to B20K debt in 6 months is pretty radical.

Softie that I am, when I learned that she was in to a loan shark for 10% per month, I took pity on her and settled the outstanding loan and interest and worked out a repayment schedule of pricipal only (no interest) albeit a few conditions viz no more money for house, no other loans until I have been repaid.

I just hope she has learned a something...

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So do I, apart from the fact you're a big old softie CC! Most Thais I know are so risk prone when it comes to taking out loans, they're walking targets for the sharks. The concept of saving up for a motorbike or other declining value asset item is so foreign, that it's almost unheard of. This is also true in UK to a certain extent, but the big difference is that there the credit is cheaper and the checks for dodgy past credit history are far more scrupulous.

It's a recipe for disaster when an uneducated farmer can just walk into a shop, hand over their land title papers to the tao gae, sign their name at the bottom of a piece of paper they can't even read, and walk out with 100 K, 200 K or whatever, just like that. I've bailed my in-laws out one too many times now over bad loan decisions and they're on their own now. Even my wife agrees, as she's at her wits end over how dumb they can be at borrowing money! The last one was her youngest brother (who has no savings, only debt), getting married for a dowry of 100 K, and didn't bat an eyelid about the amount. We bailed him out in the end, but I don't think he's learned a lesson from it all. :o

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Yes, the 20% a month was a true figure.The rich old lady has this as her 'standard' rate and only reduces to 10% with asset back up.I spoke to her about this when I paid her off myself: she speaks good english as does her daughter who is into pyramid selling of overly expensive cosmetic products(will the Thais ever learn).She targets the girlfriends and wives of the farangs when they are away!!

I agree the thais are suckers for these people but I feel that the whole rural economy is in a mess with to many people under pressure to buy motorcycles,and pickups, newer tak taks, tvs hifis fidges etc to keep up with their friends.Face Face Face is a big motivater out here in the country.They just don't have the income to repay these loans and eventually will have to send a daughter off to work in Pattaya or similar,or go under.

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Thanks for the confirmation. Wow! 240 % p.a. - nice little earner for the lady. But what other country in the world, would people actually agree to such terms, over 24 times the going bank loan rate!? You should do some psycho-analysis on your girlfriend to find out what motivated her to pay such ludicrous rates. Was it ignorance, desperation or just some hunch that she'd win the lottery tomorrow so everything would be alright!? My wife would never dream of borrowing a baht for goods, and she was like that even before we married, so it's not just my influence! "Don't spend what you haven't got" is a good motto we both agree on, but we're the odd ones out in the nation it seems. :o

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Thanks for the confirmation. Wow! 240 % p.a. - nice little earner for the lady. But what other country in the world, would people actually agree to such terms, over 24 times the going bank loan rate!? You should do some psycho-analysis on your girlfriend to find out what motivated her to pay such ludicrous rates. Was it ignorance, desperation or just some hunch that she'd win the lottery tomorrow so everything would be alright!? My wife would never dream of borrowing a baht for goods, and she was like that even before we married, so it's not just my influence! "Don't spend what you haven't got" is a good motto we both agree on, but we're the odd ones out in the nation it seems. :o

20% a month from loaners in pattaya also

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There seems to be a lot anger and bad feelings aimed at the Thais here. Many people are assuming that they are just plain ignorant, and I will not venture to guess why this is so. I've actually been doing research on consumer credit in Thailand and have looked into the rural credit system. My findings are:

1) These interest rates are comparable to rural, informal rates the world over. The new field of "micro-finance" is attempting to address this problem specifically. And it is a tough nut to crack indeed. If you're interested, check out www.gdrc.org. A website all about global efforts to finance poor people's needs for capital. The problem is one of policy, and is common throughout the world. The problem is not uniquely attributable to local ignorance .

2) These rates definitely seem extortionary. But analysis has shown that the rates are simply the result of an imperfect credit market, where poor people simply don't have access to bank loans at formal market rates.

Some of you may have heard of Ammar Siamwalla. He is arguably the most respected economist in Thailand and heads the Thailand Development Research Institute. He wrote a paper in 1990 for the World Bank. Here is the abstract:

Thailand has sought to increase farmers' access to credit by government intervention. In 1966 it created a government agricultural bank to lend solely to farm households, and beginning in the late 1970s it required commerical banks to lend heavily in the rural sector, either directly or by making deposits in the agricultural bank. The result was an enormous expansion of credit in the rural sector. But because formal lenders were either unable or unwilling to solve the information problems involved in the broad range of rural credit transactions, the informal credit sector (which charged interest rates many times higher than the formal sector) continued to thrive. Using household surveys and surveys of moneylenders, this article provides a detailed analysis of the ways in which lenders in the informal sector have solved the information problems of providing credit. The authors argue that the informal sector is competitive, and that high interest rates reflect high information costs, not the scarcity of funds.

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There seems to be a lot anger and bad feelings aimed at the Thais here.  Many people are assuming that they are just plain ignorant, and I will not venture to guess why this is so.  I've actually been doing research on consumer credit in Thailand and have looked into the rural credit system.  My findings are:

1) These interest rates are comparable to rural, informal rates the world over.  The new field of "micro-finance" is attempting to address this problem specifically.  And it is a tough nut to crack indeed. If you're interested, check out www.gdrc.org.  A website all about global efforts to finance poor people's needs for capital.  The problem is one of policy, and is common throughout the world.  The problem is not uniquely attributable to local ignorance .

There is no anger at the rural Thai villagers who are caught up in the circle of poverty - they appear ignorant what financial institutions charge for normal loans, that is not necessarily a criticism of the villagers - more of the financial institutions. There is anger expressed towards the loan sharks who take advantage of them.

I have read the web page referred to, concerning The Micro-Finance project that you describe, but I am not aware of it having reached the villages of Issan, therefore I believe it is just as inaccessible as the banks and other financial institutions to the people we are talking about.

Amar Siamwalla's (is his surname a joke?) :o paper for the World Bank in 1990 appears to have been remarkably ineffective in reducing the problem.

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I've actually been doing research on consumer credit in Thailand and have looked into the rural credit system. My findings are:

2) These rates definitely seem extortionary. But analysis has shown that the rates are simply the result of an imperfect credit market, where poor people simply don't have access to bank loans at formal market rates.

Some of you may have heard of Ammar Siamwalla. He is arguably the most respected economist in Thailand and heads the Thailand Development Research Institute. He wrote a paper in 1990 for the World Bank. Here is the abstract:

Thailand has sought to increase farmers' access to credit by government intervention. In 1966 it created a government agricultural bank to lend solely to farm households, and beginning in the late 1970s it required commerical banks to lend heavily in the rural sector, either directly or by making deposits in the agricultural bank. The result was an enormous expansion of credit in the rural sector. But because formal lenders were either unable or unwilling to solve the information problems involved in the broad range of rural credit transactions, the informal credit sector (which charged interest rates many times higher than the formal sector) continued to thrive. Using household surveys and surveys of moneylenders, this article provides a detailed analysis of the ways in which lenders in the informal sector have solved the information problems of providing credit. The authors argue that the informal sector is competitive, and that high interest rates reflect high information costs, not the scarcity of funds.

Interesting submission, your conclusion under point 2 contradicts Dr. Siamwalla's conclusion, any idea how come?

Why have you been doing research on consumer credit?

Although I've had the honor to talk over dinner with Dr. Siamwalla, I disagree with his findings in the dated report. How can we interpret "high information costs"? In my opinion it's the scarcity of funds that dictates the high interest rate. Wouldn't this be the case lenders could obtain loans from a bank, this is however not possible, (conclusively: scarcity of funds) and as next step the private sector will be approached which knows well that they can charge more than the banks. It's simply supply and demand, low supply, high prices...

Dutchy

PS Is 'loanshark' on the list of 'off limit' occupations for foreigerns or could I start my own business charging a modest 5% monthly interest rate.....?

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Chaiyapoon, WHY the he** would you pay this fricking woman off, you should have reported her to some kind of official (OK granted TIT) but there is ITV and they could have done a whole story on this THIEF. It is AGAINST the law "even in Thailand" for this <deleted>. On this very same forum I heard you guys hailing the government for getting rid of people selling goods at exacturated interest and you guys just except this loan crape as status quo. What the frick are you guys thinking??? :D It's great you guys have the dough to help people but JHC, get these people to wake up and smell the fricking vinegar, damm sure isn't roses. You might consider yourselves as softies but I would think you are just a little soft --- Oh well just an opinion, guess it's my as-hol- showing :D

I agree with plachoon (not that he agres with my statement above :D ) that the bubble is going to burst and the ONLY ones to get anything out of it is the rich. Sad :D

Kringle,when you live in the Thai countryside you tend to live by their rules and conventions.My lady took out the loan to finish off our house,which was built to a much higher standard than I had allowed for when I sent her the money.She did not have to take out the loan.

People disapear easily and accidents happen all the time and I am aware of people that have worked as hit men in the past and could do again if the price was right.Rich old thai ladies that have been loaning money for decades are well known to the local police who do nothing -- I wonder why???

As for getting TV interested there is no story there---goes on everywhere.

IF YOU DON'T WANT TO PAY DON'T TAKE OUT THE LOAN IN THE FIRST PLACE.

Other credit is available but is very slow in coming and not easy to get. :o

Dutchy,

As for loaning money at 5% you would have a queue round the block in no time. 5% would hold no fear at all for most thais,and as I understand it is legal % and not objected to by the authorities.

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:o 5% a month is still realistic in rural Isaan (Burirum/Surin), but that does not mean,that some are asking 7% or up to 10%, whereas in Pattaya or Bangkok the usual rates are 10% minimum, mostly 20% and higher.

The problem with poor thai people is that too many of them have no or very little (school)-education, due to been forced to help their parents in the rice fields, f.e.,

so when they are grown up, and have their own family, they cannot support them with the little bit of land they have got. Therefore they start borrowing a little bit, not realizing and/or caring as to when and what they can pay back. therefore the due interests are mounting up, and suddenly there is no more chance to get even.

you borrow f.e. 10.000, pay little or no interests, and in a few years you will have a nice round 100K to pay - how, if you did not have the initial 10K??

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There seems to be a lot anger and bad feelings aimed at the Thais here. Many people are assuming that they are just plain ignorant, and I will not venture to guess why this is so. I've actually been doing research on consumer credit in Thailand and have looked into the rural credit system. My findings are:

1) These interest rates are comparable to rural, informal rates the world over. The new field of "micro-finance" is attempting to address this problem specifically. And it is a tough nut to crack indeed. If you're interested, check out www.gdrc.org. A website all about global efforts to finance poor people's needs for capital. The problem is one of policy, and is common throughout the world. The problem is not uniquely attributable to local ignorance .

2) These rates definitely seem extortionary. But analysis has shown that the rates are simply the result of an imperfect credit market, where poor people simply don't have access to bank loans at formal market rates.

Some of you may have heard of Ammar Siamwalla. He is arguably the most respected economist in Thailand and heads the Thailand Development Research Institute. He wrote a paper in 1990 for the World Bank. Here is the abstract:

Thailand has sought to increase farmers' access to credit by government intervention. In 1966 it created a government agricultural bank to lend solely to farm households, and beginning in the late 1970s it required commerical banks to lend heavily in the rural sector, either directly or by making deposits in the agricultural bank. The result was an enormous expansion of credit in the rural sector. But because formal lenders were either unable or unwilling to solve the information problems involved in the broad range of rural credit transactions, the informal credit sector (which charged interest rates many times higher than the formal sector) continued to thrive. Using household surveys and surveys of moneylenders, this article provides a detailed analysis of the ways in which lenders in the informal sector have solved the information problems of providing credit. The authors argue that the informal sector is competitive, and that high interest rates reflect high information costs, not the scarcity of funds.

like Pnu says, there is no "anger or bad feelings" aimed at Thais at all. There is a sense of disbelief that people will actually pay such high interest rates and sympathy for anyone stupid enough to take loans out at 240 % p.a., but any anger is reserved for the tiny proportion (1 in 10,000?) of wealthy people who make their living out of exploiting other's misfortunes or weakness in times of financial need.

Your "research" is obviously very important to you, but I'm afraid isn't going to win any awards for originality or applicability. Rather than quoting from old hat papers from Siamwalla, you should be getting up-to-date stuff from people/organisations working directly in this field. Micro-finance is neither a particularly new field nor a panacea for the rural poor's credit problems. May I suggest that your time would be better spent in getting out into some villages and talking directly to some villagers about their sources of credit and rates, and then entertaining us with some first hand information, than second hand bunkum. :o

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