On 10 April 2021, the Thai Government announced an Emergency Decree Amending the Civil and Commercial Code 2021 (“CCC”) that was published in the Royal Gazette (the “Emergency Decree”) and became effective the next day on 11 April 2021. The Emergency Decree amends Sections 7 and 224 of the CCC and makes significant changes to the default interest rates (seen as exorbitant) that may be charged on loans (or payment instalments thereof) that fall into arrears or are not being properly paid off at the agreed to amounts.

Before a loan is taken out, a borrower and lender typically sign a contract specifying the amount of the loan itself (principal), how long it will take to pay back (term/duration), repayment schedule (e.g. once every month, pay back a small fraction of the loan plus interest) and the interest rate (percentage rate charged on the principal as the ‘cost’ of taking out the loan). If the lender fails to make his or her monthly payments, or can only pay a small part of the monthly ‘instalment’, this is called ‘defaulting’ on a loan. When such a ‘default’ occurs, usually the lender, under the loan contract or through governmental regulations or laws is entitled to extra or ‘default’ interest which can be seen as a ‘penalty’ for failing to repay the loan on time or at the agreed weekly/monthly amounts.

The Emergency Decree’s Three Main Changes to Default Loan Interest Rates

• 7.5% --> 3% for loans with no clause in the underlying loan agreement specifying an applicable interest rate for defaulting on loan repayments, the annual statutory interest rate is now 3% compared to the previous 7.5%. The Ministry of Finance may revise this rate every three years;
• 7.5% --> 5% for money debts, the statutory default interest rate of 5% is based on the annual statutory interest rate (item (i) above) with additional rate of 2%. As the interest rate is based on item (i) above, any changes in the future of the statutory interest rate will affect to the statutory default interest rate; and
• Unpaid loan repayment instalments - default interest was previously calculated on the total unpaid loan principal amount, now it is calculated on the principal of the unpaid loan instalment amount.

Due to the economic hardship and calamities caused by COVID-19 worldwide and which have particularly affected Thailand, many borrowers (whether individuals or businesses) have been struggling to stay afloat, pay staff, rent and expenses or to meet any loan obligations they might have. The Government of Thailand has made it clear that it wishes to extend support to vulnerable citizens and businesses all over the country, and lowering seemingly punitive interest rates (given the circumstances) in the case of loan defaults forms one part of these efforts. This Emergency Decree is thus one small element of plans to overhaul the CCC and bring it more into line with international norms and prevailing financial regulatory standards. This is timely given that the old interest rates charged on loan defaults, as noted by the Bangkok Post, had been left unchanged for almost a century. These new changes will only apply to affected loans and interest payments that are due from 11 April 2021 onward, overdue amounts of either type before this date remain subject to the old rates.