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New Criteria on Default Interest and Application of Debt Repayment Proceeds
December 2020
By Ekarin Tengchiew, Pobploy Wattanakrai
 

In October 2020, the Bank of Thailand (the “BOT”) issued its Notification No. SorGorSor2. 9/2563 regarding Default Interest Rate Calculation and Application of Repayment Proceeds (the “Notification”) setting out new criteria on default interest and application of debt repayment proceeds for compliance by certain financial service providers1 (the “Financial Service Providers”). Key changes as addressed in the Notification are as follows:

  1. Maximum Default Interest Rate – The Financial Service Providers may only charge a default interest at a rate not exceeding three per cent per annum above the actual interest rate charged on each relevant agreement.
     
  2. Default Interest Calculation – The default interest rate is required to be calculated only on the actual principal amount due, as opposed to the whole principal amount which remains outstanding but not yet due.
     
  3. Mandatory Grace Period – In the event that a debtor cannot make a debt payment due to force majeure, the Financial Service Providers shall set a grace period where default interest will not be charged.
     
  4. Application of Debt Repayment Proceeds - Any payment of debt must be applied in the order and priority, firstly towards fees, interest and principal amount of the then longest outstanding installment.
     

Whilst all of the above criteria apply to revolving and installment credit facilities which the Financial Service Providers enter into with individuals and small and medium-sized enterprises (SME) debtors, only the one concerning the application of debt repayment proceeds under item 4 above applies to large corporate debtors. Notwithstanding this, the Notification will not apply to a syndicated facility agreement if there is any offshore lender not being subject to a supervision of the BOT participating in the syndication.

The Notification will generally become effective on 1 April 2021, except for (i) the rules under items 1 to 4 above in respect of the Financial Service Providers which are nano finance business operators or asset management companies and (ii) the rule on application of debt repayment proceeds under item 4 in respect of all Financial Service Providers, which will become effective on 1 July 2021. In this connection, it is noteworthy that the Notification also has a retroactive effect and will apply to all agreements including those entered into prior to the relevant effective date.

Please feel free to contact the authors for further information about the Notification or any related legal matters.

_____________________________
 Under the Notification, “financial service providers” include (i) financial institutions, (ii) companies in a financial group whose businesses are personal loan, nano finance, leasing, hire-purchase and asset management companies, (iii) specialised financial institutions, (iv) operators of personal loan under supervision business, (v) operators of nano finance under supervision business, and (vi) asset management companies.


This document is solely intended to provide an update on recent development in Thailand legislation and is not purported to provide a legal opinion, nor a legal advice to any person.

 

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