Letter to Shareholders

Impact in microlending is not just about low interest rates; in fact, they are probably too low if we want to further promote inclusive finance.

The most visible subject of debate among pundits, policymakers, politicians, and practitioners is interest rates. Today, Thailand’s title loan industry yield is capped at 24% APR, and the regulations are rather prescriptive about other aspects of lending, including payment hierarchy, marketing messages, and collections fees. However, most public discussions involving academics, public figures, and regulators tend to focus on interest rates, with the majority of them holding the opinion that at the current ceiling for this product (i.e., 24% APR), interest rates are too high and burdensome to borrowers. It is not uncommon to hear the label “usurious” being used when discussing this topic. In contrast, we have found that the borrowers themselves generally hold the opposite view. It is critical to understand the reason behind this.

For over a decade, our company’s leaders have been active observers of customer behavior and students of microfinance. Below, we share six insights we have derived based on this experience serving the underbanked. The lessons we have learned after overcoming our own experience biases as salaried employees lead us to offer three reasons why a 24% annualized interest rate does not cause the self-employed to feel the pain of sticker shock. Being able to empathize and see the world through the eyes of the borrowers is the first step to designing solutions that are comprehensive, feasible, viable, responsible, desirable, and sustainable. Additionally, we also share three insights that are relevant to serving the underbanked.

Further, I also argue why this 24% APR, which is the regulatory interest rate ceiling, should be raised in the short-to-medium term if Thailand wants to combat the societal problem of loan sharks sustainably.

Insight 1. Sensitivity to interest rates is driven by velocity: a lesson from a Nicaraguan merchant.

The first reason why NTL’s borrowers can easily afford a 24% APR relates to the concept of velocity. To explain this, I provide you with a passage from the book What the CEO Wants You To Know by management guru Ram Charan, who states the following:

Many years ago, I took a group of MBA students to an open-air market near Managua, Nicaragua. There merchants (almost all women) sold everything from pineapples to shirts and necklaces. We approached a woman selling clothing in a small shop, and I asked her how she got the money to pay for her merchandise. She said she borrowed it, paying 2.5 percent interest a month. One fast-thinking student did the math—2.5 percent multiplied by twelve months—and announced that the interest rate was a whopping 30 percent a year. The woman gave me a disapproving look and said in Spanish that the student was wrong. Compounded month to month, the rate was 34 percent annually. How much margin did she make? Just 10 percent. So how could she survive borrowing money from loan sharks charging 34 percent a year? We had to ask. Annoyed by the stupidity of the question, she made several sweeping circular motions through the air. Her gesture meant rotation—rotation of inventory, or turning the stock over. She knew intuitively that earning a good return had two ingredients—profit margin and velocity. If she sold a blouse for $10, she made just $1 in profit. To pay the interest on the loan and to restock her cart, she had to sell her wares again and again during the day. The more she sold, the more “10 percents” she accumulated. The word “velocity” describes this idea of speed, turnover, and movement. Think of raw materials moving through a factory and becoming finished products, and think of those finished products moving off the shelves to the customer. That’s velocity.

This example is about someone earning 10% gross profit margins per unit of inventory and paying 2.5% monthly interest (34% compounded annually). Now imagine a trader who is selling food or those silicone mobile phone cases often found in shopping mall retail spaces. The margins on consumer goods are significantly higher than 10%, usually around 60–75%, which means that they earn 200–300% return on each case they sell. In this example, the interest rate of 2.5% per month is a relatively small cost. If the velocity of their inventory is twice per month, the cost to finance each round of inventory turnover is only 1.25% of revenues. Using this example, it is understandable why a small business owner would be willing to pay even 10% or up to 30% per month, which is a normal interest rate charged by moneylenders across Thailand.

In our years of evaluating the incomes of micropreneurs, we have never encountered retail merchants or food cart vendors charging margins as low as 10%, as mentioned in the Nicaragua-based example; typically, unit gross profits are 50% (which is double their cost of goods or raw materials), and even that is somewhat on the lower end of the spectrum when it comes to retail transactions.

To validate this for yourselves, try interviewing your favorite shop house food vendor and ask them about how much their rent and raw materials cost, the daily wage paid to their employee (if any), and how often they need to restock. Simple calculations should help you appreciate that gross margins are high and that the majority of costs are driven by overhead and distribution, not raw materials. Although the above example is for a trader in Central America, it can be applied to virtually any country as fundamental retail economics and borrower behavior are fairly common and consistent worldwide.

The part of this anecdote that I find less relatable, however, is that the Nicaraguan woman understood the concept of compounding. We have not found this to be the case among underbanked borrowers in Thailand. Our experience has been that consumers on the lower end of the socio-economic pyramid prefer loan prices quoted in simple or flat monthly interest rates because it is easier for them to calculate their interest burden and installments using a calculator. In fact, most college-educated employees who did not study finance in college struggle to distinguish between flat-rate loans and annualized percentages, and even fewer have the ability to perform the conversion themselves.

This concept of simplifying communications for the less financially literate has been promoted by microfinance practitioners globally and also receives support from customer-centric design companies such as IDEO, which has a Bill and Melinda Gates Foundation–sponsored program called Last Mile Money. In their online Financial Confidence Playbook, Last Mile Money specifically advises designers of inclusive finance interfaces to completely “let go of percentages and explain terms in intuitive language.” Simply put, this entails highlighting the absolute cash outlay (read: monthly, weekly, or daily installment amount), which is a more useful figure for borrowers to determine affordability, along with just including the interest rate for transparency purposes. This suggestion contrasts with the well-intentioned and recent “responsible lending” policy issued by the regulators, which mandates that lenders prominently publish an APR-formatted interest rate when communicating with potential borrowers.

Insight 2. Borrowers rationally prioritize affordability over interest rates, which are related but separate considerations: lessons from observing loan sharks and studying financial diaries of the self-employed.

The second reason why NTL’s borrowers can easily afford a 24% APR is that borrowers of this nature tend to perceive installment size as the price of a loan, not the interest rate. This is not dissimilar to how most people think about affordability when buying tangible goods. The determination of whether or not an item is “affordable” is made when comparing the cash outlay (or price) with the funds the buyer has to deploy. If the price of the item is higher than the funds the buyer has available, the item is considered unaffordable, and vice versa. Similarly, for loans to the underbanked, affordability is related to installment size or how much cash outlays the borrower will have to make. This distinction between whether the cost of a loan includes borrowed principal or only the interest component seems to be a topic of confusion when discussing the cost of a loan. An online search for “cost of a loan” will yield multiple definitions.

Our customers are in the camp that treats the entire amount to be repaid (principal plus interest) as the cost of a loan. Specifically, they are most concerned with the installment size and repayment terms. Understanding the nature of our clients’ intermittent cash flows should help explain this behavior.

Compare, for example, the cash flows of a rice farmer with those of a motorcycle taxi driver. Rice farmers harvest their crops once or twice a year depending on a variety of factors, including the amount of rainfall, the geographic location of their plot of land, and their planting methods. These seasonal activities will cause farmers’ cash flows to spike and be concentrated during those periods of harvesting and planting. This is in contrast with the situation of a motorcycle taxi driver in Bangkok, whose income fluctuates with the daily weather, holiday season, and random traffic conditions. When these borrowers come to us for a loan after first prioritizing that the amount of funds they can get will suit their immediate needs, their next question is about the installment size and repayment terms, not interest rates. Because of the erratic nature of their cash inflows, the rational choice for these borrowers is to select a loan that has a lower installment (i.e., one they can afford) to minimize the chances that they will fall behind.

Out of the over 2.5 million borrowers we have served over the last five years, 70% were self-employed farmers, micro-entrepreneurs, and small business owners whose incomes fluctuated widely depending on their income source. Notably, nearly all of them exhibit this behavior of choosing affordable installment sizes over minimizing interest rates.

A somewhat unique feature of title loans is that sometimes borrowers do not need a high amount of cash when they visit a lender. In this instance, when their immediate cash flow need is less than the value of their vehicle, they face a dilemma: do they (a) take out a loan only for the amount they need to save on interest expense and benefit from a lower monthly installment size or (b) take the maximum loan amount they can against the equity value of their asset because they only have one vehicle to pledge and cannot predict what financial troubles they might face in the coming days, weeks and months? Usually, if they believe they can afford the installment, borrowers tend to opt for the costlier and seemingly less risky route of maxing out their loan size and having a bit of extra cash on hand. Our observation is that our clients are actively and consciously self-managing risk by minimizing installments and effectively trying to avoid losing their pledged assets.

NTL’s solution to this predicament is to offer the Tidlor Card, which provides clients with the certainty of being able to access more of their equity later, even if they take only what they need upfront.

After studying and competing against informal lenders for years, we can conclude that the borrowers’ inability to manage affordability via smaller installment amounts and flexible loan terms is what usually triggers a vicious cycle, leaving them in an inescapable debt trap. Most informal lenders provide only short-term loans with strict daily or weekly repayment conditions that often last only 30–40 days. Besides, failure to deliver the installments on time often leads to punitive fees being piled on, interest rates being compounded, unsavory collections practices, and, in extreme cases, physical harm.

Insight 3. A loan charging 24% APR is a relatively cheap option compared to borrowing from informal sources, including friends and family.

The final reason why NTL’s borrowers can easily afford a 24% APR is that it is a comparatively cheap source of funds. The lowest interest rate we have seen moneylenders charge is a 5% per month, 60% per year simple rate, which exceeds a 100% effective rate. In fact, it is common for informal lenders to charge five to six times this rate at   a flat rate of around 20-30% per month. The most frequent rates we came across were 15% flat per month (251% APR). Given these alternatives, if formal loans are accessible, it is a no-brainer decision to choose a 24% effective rate loan, which equates to less than 1.2% per month in flat terms. Simply put, it is much cheaper than borrowing from informal sources.

It is worth noting that all of my examples and rationales have been concerned with our financial solutions being deployed to assist the self-employed. Many salaried employees who come to NTL often do so because they need investment capital for a new business, have emergency needs, or want to refinance existing loans to reduce their monthly financial obligations. Coming to a lender like NTL with these objectives is sensible if the alternative is having to resort to borrowing from informal sources.

Within NTL, we educate our employees to recognize that, unlike the self-employed, salaried employees are unable to invest the borrowed funds in inventory and increase their income after taking out a loan. Therefore, unless they are reducing their monthly installments and consolidating debts, they should not borrow from us. Moreover, while we do not promote title loans for consumptive purposes, it is impossible to distinguish the true purpose of borrowing because money is fungible.

To illustrate, consider the following story about fungibility and loan purpose that I recall from my training at the Boulder Institute of Microfinance:

A microfinance company in India lent money to a woman who wanted to buy a sewing machine to generate income for her family. The day after the loan was disbursed, the lender sent an employee on a site visit to confirm that the disbursed funds were, in fact, used to buy a productive asset. The employee returned to report that the company’s purpose had been fulfilled, and everyone felt good about their role in financial inclusion. However, what the employee was unable to uncover during their site visit was that the day before the borrower applied for a loan, her husband dipped into the family savings jar and purchased a television at a similar price to that of the sewing machine. So, did the lender finance the TV or the sewing machine?

There are multiple lessons to take away from this anecdote. First, for designers of regulations, there is a natural limit to what prescriptive, well-intentioned policies regarding income assessment, borrowing purpose, and collateral type can achieve. The lender in this example had to incur the cost of the employee traveling to confirm the purpose of borrowing, only to render the entire activity ineffective. Second, it highlights an issue with financial literacy, planning, and discipline within the borrowers’ household, a topic that we will revisit later.

Insight 4. Loan terms, service quality, and collections standards are more important than interest rates.

While loan pricing, amount, and availability receive most of the attention when it comes to microcredit, what most observers overlook is how customers are treated after they receive those loans. It is critical to understand that once a borrower receives cash, their relationship with their lender lasts for as long as it takes to pay off those loans. Specifically, this relationship encompasses elements that should include transparency in loan agreements (ideally in the form of plain-language contracts), collections notifications, the provision of receipts upon repayment, social network monitoring for complaints, round-the-clock call centers, self-service apps, compliance with collections laws, sustainable delinquent account resolution procedures, and support for customers to establish and maintain a credit profile. It is in this post-disbursement stage that the practices of licensed lenders diverge from informal sources and account for all the differences.

Moneylenders are a deceptively appealing option for those in need of loans because the borrowing experience is frictionless. Such lenders are often members of communities and ostensibly approachable, hassle-free, easygoing, flexible, and fast to disburse. In terms of the process, they easily beat licensed title loan operators in their proximity, speed, certainty of approval, and familiarity because they do not have to comply with any regulations or guidelines related to KYC or responsible lending. In exchange for their guaranteed approval, they demand high interest rates and impose unreasonably short and frequent repayment schedules. Moreover, these lenders often do not provide any documentation and freely ignore a borrower’s repayment capacity because they do not plan to adhere to any relevant laws. Their approach when customers fall behind on installments is to apply a combination of charging high late payment fees, using verbal abuse, threatening family members, causing social embarrassment, and, in the worst cases, inflicting physical harm.

However, unfortunately, while collections practices are just as important as the size, speed, and affordability of the loan obtained, few borrowers shop around and compare these elements when they are desperate to secure funds quickly and only come to realize their mistake once it is too late. This behavior is understandable. When the already fragile cash flows of low-income borrowers experience a sudden disruption, their immediate priority is to find money quickly to relieve the stressful situation. The natural reaction is to reach out to people they know for help. Oftentimes, misplaced trust in friends, neighbors, or friends of friends—essentially, anyone familiar—entraps unsuspecting borrowers and lures them to engage in borrowing from the wrong people. This is akin to a situation where when someone breaks your leg, you rush to the nearest hospital immediately, and you do not stop or take the time to interview the doctor treating you once you get there because you just want the pain to end. People with financial emergencies behave similarly.

Thus, our view is that financial inclusion entails financial security and peace of mind for the economically vulnerable throughout their entire relationship with us, not just at the loan approval phase. When people are stressed, they tend to make bad decisions and often become blind to risks.

At NTL, we try to address borrowers’ emergency needs quickly while ensuring transparent processes and documentation. We also design flexibility into our loan features to help clients better manage their cash flows. We are continually trying to provide more optimized solutions without incurring any additional cost or risk. Since our interest charges are already a fraction of those charged by moneylenders, the challenge at hand is to find ways to profitably deliver these loans competitively with less friction upfront while providing superior service standards afterward. Beyond access to quality loans, the value we provide clients is peace of mind.

Insight 5. Risk-based pricing is a good concept and catchy phrase but an incomplete idea. Cost-based pricing is more appropriate.

Many well-intentioned policymakers and academics have been promoting the concept of risk-based pricing. If a customer is lower risk, the lender should charge less interest and vice versa. Theoretically, this approach focuses on fairness and is intended to reduce the interest rates charged to higher-quality borrowers who likely have a lower credit cost while also increasing the interest rates charged to weaker borrowers to compensate for the costs associated with delinquency. Ideally, if lenders can charge more for riskier borrowers, they will be more willing to lend. Lenders themselves tend to agree with it and, to a certain extent, try to put this concept of relative risk and relative reward into practice.

However, where definitions matter is that operators appreciate that risk ultimately results in credit losses, which is another type of cost—more precisely, credit cost. So, if we extend this logic, we should arrive at the same conclusion that risk-based pricing is a subset of cost-based pricing and that the principle behind risk-based pricing is not different from that behind cost-based pricing in that it aims to optimize profit margins.

We propose then that pricing based on risk is incomplete, as it misleads casual observers to criticize retail lenders for the relatively large gap observed between their net interest margin (yield minus their cost of borrowing, or NIM) and credit costs. Where non-operators and salaried government officials disagree with lenders is on the cost to serve. For a licensed operator to deliver the critical elements of compliance and customer service that we mentioned above, lenders have to make substantial investments and incur ongoing expenses, which include investments in IT systems, credit analysts, rental costs of branches, training costs of employees, staff salaries, layers of processes needed to ensure compliance with relevant laws and regulatory standards, and overhead costs related to governance. The costs that should also be reflected in lending yields include variable costs, fixed costs, and hybrid costs, all of which behave a bit differently with regard to scale, growth, and investment cycles. The differences in the cost mix will reflect different business strategies and capabilities.

The following is an excerpt from an article titled “Why are microfinance interest rates so high?” where Elisabeth Rhyne, former managing director of the Center for Financial Inclusion, summarizes the importance of cost when considering the appropriateness of interest rates:

The arithmetic of tiny loans. Interest rates face an uncompromising arithmetic of three main cost elements, all context-specific. How big are the loans? What is the maximum loan officer caseload? How much are loan officers paid? A lender making $1,000 loans in a dense city market with a labor market that allows modest loan officer salaries can charge a much lower interest rate (think Bolivia, with rates in the 20s) than a lender making $100 loans in the rural parts of a middle-income country where loan officers earn a lot (think Mexico with rates in the 60s).

Notice the absence of the cost of risk in the three cost elements. The economics of smaller loans are more sensitive to the cost to serve. We can explain this through an extreme and simplified example of a new branch that services only motorcycle title loan clients who borrow on average 25,000 Baht at the maximum interest rate, with a 24-month contract. Let us assume that borrowers at this imaginary branch have not missed any installment payments and pay exactly on their due dates (which is obviously impossible). Let us also assume this branch has two employees who are being paid 15% over the current minimum wage, along with standard staff benefits, a nominal rental rate of 15,000 Baht per month, and moderate utility expenses. The capacity of this branch will be limited to how much these two employees can accomplish in an eight-hour workday. To earn enough interest income to pay for only the direct monthly costs of this single branch, we would need to originate over 180 new clients per month. Over a year, these two staff members would have to be able to service over 2,160 clients. Further, within a month, they would have to process loan repayments for each of those clients, an activity that takes time away from servicing new borrowers. So, at this break-even point, after a year, the average cost to operate this branch is 11% of the outstanding loan balance.

Again, this is assuming zero delinquency and no credit or collections costs, so no cost of risk. The economics for a single branch assuming these modest direct costs already fail to make commercial sense.

Now consider that for many players (including NTL), the minimum loan size is in the low thousands (ours is 4,000 Baht). Because the time and resources spent are the same regardless of whether a borrower takes out a 4,000 Baht loan or a 35,000 Baht loan or makes a 2,000 Baht installment or a 500 Baht installment, the relative cost to originate the smaller loan and take repayment is much higher and loss-making at 24% APR.

To make the math work, lenders must find ways to reduce costs, screen out fraudulent and bad customers to minimize collections-related activity, and increase the loan size to achieve scale. Moreover, despite the trend toward digital adoption, title lending is still primarily a branch-driven business model. This is evidenced by the nearly 30,000 title loan branches in operation compared to less than 10,000 bank branches.

Notice that I have not included the cost of IT/systems development, customer service hotlines, management overhead, and other support functions like operations and finance in the aforementioned example. We will revisit the need for these below.

Insight 6. Lenders can choose to prevent or mitigate the cost of risk.

If a lender wanted to lower risk by prevention, they would add screening filters, thereby effectively tightening the underwriting criteria and ending up approving fewer loans. Naturally, this would result in more people being excluded from the formal financial system, thus compounding the informal moneylender problem in society. Conversely, if that lender was more tolerant of delinquency, they would relax the criteria and instead invest more resources into collection activities such as call reminders or customer home visits, which, again, relates to yield. If yields were purely based on the cost of risk as defined by losses, the choice for operators to lend more easily but dedicate more resources to mitigate losses through collections activities would not be available.

Between 2011 and 2017, NTL conducted a pilot project where we attempted to compete head-to-head with loan sharks who operated within traditional wet markets. After studying their underwriting and collections practices, we proceeded to clone their entire operations, including easy approval and daily cash collections. We had a map for every vendor and every stall in 80 pilot wet markets around the country. The only modifications we made to what we saw loan sharks doing are as follows:

1. We provided borrowers with copies of loan agreements and receipts.
2. We charged the 36% annual interest rate, which was lower than the 360% flat rate per year (30% flat rate per month) charged by loan sharks.
3. We paid our employees our standard entry-level salary (approximately 12,000 THB per month at the time).
4. We complied with legal collections and data privacy practices.

What we learned was that by sending our employees to collect daily installments of a few hundred Baht per day, we were able to minimize delinquencies and NPLs to low single-digits. We managed to steal market share because our interest rates were relatively cheap, and our daily installment size was roughly the same. However, we were losing money. The problem with this model is that the cost to collect and keep NPLs low was too high. A single employee could service a maximum of 50–70 borrowers in a normal eight-hour work day. We experimented with installment collection frequency by trying every other day and every week to optimize operating costs with the cost of risk, which did not work. Ultimately, after four years of trial and error, we threw in the towel. The four-year experiment led to cumulative losses of 100 million Baht. The lessons we learned from that test program shaped our thinking on product design, risk management, consumer behavior, and financial inclusion.

Four pillars to reduce the problem of illegal moneylenders and promote financial inclusion

In November, Thailand’s Prime Minister went on TV to declare that tackling the loan shark problem was a national priority. Our company responded in support of this initiative by training our branch staff to assist those indebted to loan sharks in registering for this government program.

If effective, the supply of informal credit should be replaced by loans from licensed lenders, assuming these creditors could afford to onboard the same degree of risk taken by loan sharks. Raising interest rates would help with this.

Pillar 1. We must enable licensed players to compete with informal lenders, which will require raising interest rate ceilings and reducing regulatory complexity in exchange for compliance with higher consumer protection standards.

The current number of low-income borrowers served by licensed lenders indicates the size of the market under the current combination of interest rate ceilings and regulations. This is a figure that regulators can track. If licensed lenders were allowed to charge higher than 24% APR, this population would become larger, and the number of loan sharks would reduce.

Fundamentally, we believe that moneylenders can be rooted out if licensed players can be more competitive regarding the ease and speed of lending. However, relaxing our screening criteria and removing steps in the loan approval process to match those of moneylenders will introduce risks to levels that are too high to accept, given the current interest rate ceilings. Once loans become too easy to access, the incentive and potential for customer fraud rises dramatically, resulting in drastically higher losses for lenders if such activities go undetected. These dynamics occur before we even get to the cost of providing such loans with a service quality that lawmakers can accept, which is also quite high.

Therefore, it is our contrarian opinion that interest rate ceilings should be raised or eliminated but not lowered. If we properly incentivize or motivate licensed players who are equipped with access to capital, technology, a broad distribution network, risk management capabilities, and scale, they will compete to drive moneylenders out of the market, and society would then benefit from widespread high-quality lending and collections practices.

It is critical to note that, thus far, we have only discussed yields at the interest rate ceiling. However, not all lenders are offering all loans at this rate. Some combination of risk- and cost-based pricing already exists. Larger loans to clients with sufficient income proof and solid credit history receive lower interest rates, while smaller loans to clients with unstable income and no credit history usually borrow at higher yields. In this discussion around financial inclusion, the idea is that higher yields will allow lenders to compete more effectively against the informal players, and potentially, interest rate ceilings can be higher for smaller loan sizes.

Higher interest rates aside, we also think simplification can help promote more competition. Navigating the current regulatory environment is a challenge for would-be lenders. In fact, it is difficult even for already-established lenders. We have a variety of licenses and laws crisscrossing the same topic, including nanofinance, title loan and personal, hire purchase, land pledging, mortgages, and picofinance. Each license or law has a different combination of requirements related to interest rates and rules on fees, geographic reach, collateral, loan purpose, source of income eligibility, and ability to repay. To add to the complexity, the relevant regulators include the Office of Consumer Protection Bureau (“OCPB”), Ministries of Interior, Finance, and Commerce, and the Bank of Thailand. This regulatory patchwork that exists across different parts of government makes it challenging for operators to serve multiple segments as experts are needed to navigate each license.

We must also bear in mind that although this solution will have a short-term impact, it must be monitored over a long period of time. During up-cycles, when credit and borrowing costs are low, lenders should be allowed to enjoy higher profits so they can invest to improve standards and innovate to find newer and better solutions for clients. Moreover, profit margins for lenders should be high enough to encourage healthy competition and ongoing investments in innovation. As a result, successful players will amass higher equity reserves, reduce financial leverage, gain scale, reduce their marginal cost to serve, and eventually drive down interest rates. This idea of taking a longer view is critical to a healthy financial system because when the economies inevitably take a turn for the worse, such as during the COVID-19 pandemic, licensed players with strong balance sheets will be able to step in and provide debt relief and support to fragile borrowers. Moneylenders are unlikely to be so cooperative with lawmakers.

Pillar 2. We have good rules and regulations; now, we need additional enforcement. Nonbank license holders have been caught engaging in trickery.

Another critical requirement for this strategy to work, however, is the intentionality of licensed operators themselves. The aforementioned insights into borrower behavior, while potentially foreign to NTL’s shareowners, are well-known and understood among many lawmakers and lenders, both formal and informal.

Moreover, unfortunately, not all formal lenders choose to operate under well-meaning principles. Instead, they choose to use their insights to exploit the financially vulnerable. Within weeks after the government’s campaign against informal lenders was announced, multiple stories appeared in the media featuring auto-backed lenders engaging in predatory lending behavior and taking advantage of unsuspecting borrowers.

As an operator with thousands of employees, we can relate to infrequent poor customer experiences caused by rogue employees. However, systematic and institutionalized misbehavior is unacceptable. Licensed lenders who regularly and intentionally ignore standards, fail to install quality controls and transparent processes and are repeatedly caught conducting predatory lending activity should face proportional consequences. Our view is that warnings and penalties should be imposed for breaking the rules and, in the worst cases, licenses should be suspended or revoked.

Since our proposal is higher interest rates in exchange for greater inclusion backed by higher standards, we must take measures to ensure that the operators understand and appreciate the importance of consumer rights and borrower protection; otherwise, the unintended consequences of this well-intentioned effort might be to drive unsuspecting consumers into the arms of bad actors.

That said, we know of several local and regional license holders who we believe have good intentions but whose stage of development and access to capital prohibits them from offering higher quality and charging lower rates. It is these law-abiding operators who follow the rules that should be encouraged to grow and recruited in the mission to reduce inequality. Many of them have demonstrated their intent to comply by joining and participating in the Vehicle Title Loan Trade Association of Thailand (VTLA), an industry body established to improve industry standards and encourage productive private and public sector dialogue.

Pillar 3. We need stronger national data infrastructure than digital banks

In 2022, the Bank of Thailand (BOT) announced a financial landscape in which the initiative to allow for virtual banks was introduced. Presumably, these digital-native institutions will serve more consumers while operating with a lower cost structure and pass those cost savings on to borrowers, extending financial inclusion to everyone with a mobile phone. Less headline-grabbing were the elements of the financial landscape document related to open competition, open infrastructure, and open data.

Between these two elements of the financial sector agenda, with regard to financial inclusion, our management team remains skeptical that introducing virtual banks will do much to provide broader access to cheaper credit. In our opinion, Thailand’s banking infrastructure—comprised of the dispersion of branches and ATMs, connected payment rails, governance, shareholder composition, the existence of a credit bureau, and supervisory resources—is already far superior to those of many countries. Only incremental investments by existing players would be needed to achieve a more inclusive financial system, and these can be nudged with incentives

What we need is the less eye-catching part of the plan, which is data infrastructure. Mandated National Credit Bureau (“NCB”) participation for all licensed lenders; expanded datasets from cooperatives; electricity, water, and phone bill information added to the NCB; longer storage period for NCB history; and open API banking regulations would all do significantly more, and at a faster pace, for the banking system than issuing more banking licenses. Most Thai citizens have a bank account and, since the COVID-19 pandemic, have engaged in some kind of digital financial transaction. Many remain underbanked because of information asymmetry. The information needed to lend to them is either unavailable or too expensive to acquire. We believe that the marginal cost of existing banks to lend, assuming they had access to more robust data, should be significantly lower than that of a new player who obtained a digital banking license.

Although banks have systems and scale, lending without information dramatically increases risk. This is evidenced by the “fintechs” that have attempted to launch businesses using only alternative data. They have found out that it is not lending that is the challenge but rather collections. Greater availability of higher-quality financial data could help rebalance the equation between risk prevention versus mitigation and help digitally-enabled players lend more. Additionally, it is also an enabler of risk- or cost-based pricing. However, in exchange for accessing open data, they should be required to reciprocate and contribute to the data pool. Just as some banks tweaked their lending policies and operations to encourage clean energy and deter polluters, the NCB practices of non-bank financial institution borrowers (NBFIs) could be taken into consideration when evaluating loans to nonbank lenders.

In sophisticated markets, consumers, in general, possess a higher awareness and understand the importance of maintaining good credit histories. This national mindset of treating credit history as an asset allows an economy to grow by providing credit to people who may not have assets to pledge against loans or pay slips to qualify for unsecured loans. With this basic understanding of credit scores in place, loan products and marketing campaigns can be designed around improving scores, further enhancing awareness, and improving market efficiency.

This topic is particularly relevant because while the technology exists for licensed lenders to reduce the cost to serve and potentially improve the estimation of risk, ultimately leading to the marginalization of loan sharks, the data infrastructure and policy initiatives to maximize the use of such technology and utilize the data simply is not in place yet.

Pillar 4. We need to invest in a more financially literate citizenry.

Thailand’s household debt levels are not only high but are also of poor quality, mostly incurred to finance unproductive consumption. These dynamics highlight a much larger problem than just the availability of informal and ill-intentioned lenders and low-interest rate ceilings. They are symptoms that are caused by a generally financially illiterate and undisciplined population.

Another partial solution to the prevention of the loan shark problem is financial literacy and education. With regard to this topic, we have been a pioneer. By 2012, long before financial education and financial literacy programs became fashionable buzzwords among banks and regulators, our company had already developed, piloted, and rolled out interactive financial literacy programs for our clients. We have committed to this activity and expanded its reach beyond our borrowers to rural communities, factory workers, and our own employees.

We believe that if people were taught basic personal finance or money management in high school, college, and early in their careers, inequality would be lower, and the societal problem of informal moneylenders would be reduced. We were recently surprised and disappointed to learn that only about 50% of our own borrowers know what the NCB is or why it matters to them. Evidently, we have a long way to go to raise awareness and understanding.

The following are some facts and statistics concerning our commitment to financial and digital education since 2012:

1. We have engaged with 220 communities and over 6,000 people within those communities.
2. We have collected the financial diaries of borrowers.
3. Between 2018–2023 we have worked with Inspire, a project by HRH Princess Bajrakitiyabha to provide financial education to inmates who are nearing the end of their prison sentences to reduce recidivism.
4. We are a leading participant in the SET’s Happy Money Program, with 56 volunteers from NTL having been certified
5. We have invited like-minded members of the Vehicle Title Loan Association (VTLA) to participate.

As I mentioned previously, our company’s leadership team is staffed with career professionals who have chosen to align with a purposeful organization. This is reflected in our proactive campaigns to reduce consumptive spending. For example, we launched a series of initiatives in 2019 that included a best-selling financial literacy book and accompanied by an ad regarding over indebtedness which went viral, to warn people about overspending in an attempt to encourage a larger audience to make better financial choices. (Click to view video)

As a company, we are also committed to educating borrowers on their rights and self-regulating our marketing campaign messages to never promote features like “no NCB checking,” “no blacklist checking,” or encouraging people to borrow for consumption purposes. (Click to view video)

We will focus on the substance of impact now and pick an appropriate acronym later. We proudly present to you our first impact report card.

ESG, UNSDGs, BCG, One Report, sustainability, and impact are themes, acronyms, buzzwords, and reporting tools that have been in focus among investors and the financial community these past few years. At present, it is impossible to attend a business event and not be exposed to one or several of these terms. Unfortunately, I must admit that as an organization, our position on which framework to apply, definitions to use, templates to follow, or metrics to track remains fuzzy. We find that the templates tend to be generically crafted, taking a one-size-fits-all approach to trying to measure a very diverse range of topics across a wide range of industries. Often, the various goals are also in conflict with each other. What we are crystal clear about, however, is that we are making positive contributions to the world and that our organization is more equipped to influence social rather than environmental outcomes.

Although we struggle to reconcile the ESG questionnaires with the countless qualitative stories and anecdotes of customers whose families have benefited from our services, we recognize that measurements are needed. Quantifying the benefits so that outsiders can better understand NTL should help make the issue of financial inclusion more tangible. While we work to identify a format that works for NTL, we encourage our shareowners to pay a visit to one of our branches and strike up a conversation with our borrowers. You will likely learn about our role as a solution provider and how our clients use the funds they receive from us to improve their livelihoods.

To help all stakeholders converge on a common understanding of what we mean by impact, we have analyzed the data that we have for evidence, as well as designed and commissioned our own impact survey. We were motivated to do this after having worked on a project with Temasek Trust’s Centre for Impact Investing and Practices last year.

Below is a list of metrics that we have developed and captured and will continue to fine-tune and improve upon as we grow your company:

Borrowers within our portfolio:

• 17 out of 20 feel that our company has helped improve their quality of life.
• Over half of the self-employed business owners feel that the loan by NTL helped them grow their businesses and increase their income.
• 1 in 2 do not have any financial goals, and among those who do, 3 in 4 agree with the statement, “NTL has helped me with my financial goals.”
• 1 in 5 were rejected by loans from banks before coming to NTL.
• 2 in 5 have loans with other lenders.
• 4 in 5 expressed that our fees, interest rates, installment payments, and fines are easy to understand.
• 13 in 20 worry less about not having access to funds.
• 13 in 20 report a higher ability to manage and control their finances.
• 4 in 5 feel that their loan repayment terms are not a burden, 1 in 5 feel some burden, and none of them believe the monthly installment represents a heavy burden.

The benefits of NCB:

1. Over the last year, we helped at least 34,657 borrowers with previously bad credit histories improve their credit scores.
2. Over the past year, we helped at least 78,359 borrowers who previously had no or thin credit file histories establish a good credit history with the NCB.
3. 3 in 5 borrowers who came to us with bad credit histories managed to improve their credit scores.
4. 3 in 4 borrowers who came to us with nonexistent or thin credit files are building good profiles.
5. 4 in 5 customers who had good credit profiles at the time of borrowing maintained their standing through their relationship with us.

Further, most shareowners also forget that our company’s insurance proposition also has financial inclusion underpinnings. Insurance started as a free add-on to help improve insurance literacy.

Just as we ensure post-sales service for our borrowers, we have also taken steps to do the same for our insurance brokerage unit. In the fourth quarter of 2023, we launched a dedicated hotline number “1501” for our insurance clients. To our knowledge, NTL is the only broker with a dedicated 24/7 service team whose job is to facilitate claims filing and follow-up. In terms of clients who purchased insurance from us, we received the following feedback:

• 3 in 5 customers purchased voluntary motor insurance for the first time with NTL Broker.
• Out of the clients who purchase insurance via 0% installment option
  • 1 in 5 would have downgraded their insurance policy without this option;
  • 1 in 10 would not have purchased insurance at all;
  • 1 in 10 were able to upgrade their coverage due to our installment option; and
  • 4 in 5 do not have a credit card.
• 7 in 10 only have one vehicle and would not have alternative forms of transportation in the event of an accident.
• 4 in 5 need their vehicles for regular use (3–4 days per week).
• If they did not have auto insurance and got into an accident, half of the customers would not have any savings to repair their damaged vehicles.
• 98% believe NTL Broker’s sales process is transparent and fair.

Over the last couple of years, we have received a lot of encouragement from shareowners who identify with our non-financial goals. While NTL occupies a tiny corner of the finance and banking industry, I consider our contribution to impact to be outsized. Shareowners who only track quarterly earnings and other financial ratios will have a harder time understanding our decisions. We believe that changes in these metrics in both absolute and relative terms, while fuzzy in comparison to neat accounting entries, represent a more accurate reflection of NTL’s enterprise value, for they align more closely with the benefits we deliver to our clients.

In summary: regulated competition, data, and literacy

Financial inclusion, inequality reduction, and moneylender eradication are audacious goals. Progress toward these objectives will not materialize automatically, and there are no silver bullets. A good place to start is by recognizing that our current consumer-lending practices are skewed toward serving white-collared salaried employees, who are the minority – estimated around 10 million – out of the working-age population of approximately 40 million people; therefore, we should avoid the mistake of treating the majority who are self-employed as a homogeneous group because different underlying business models generate unique cash flow cycles, causing complexity and a high cost to overcome information asymmetry. Once we appreciate these conditions, our financial system design can be modified appropriately, with the relevant players actively orchestrated and nudged over many years, election cycles, and, potentially, decades or generations. The commitment required for this is considerable.

As with most social issues, the problems are complex and the issues numerous. To make things harder still, we believe that the steps in the four directions proposed need to be taken concurrently. To illustrate, we can only afford to invite more lenders into the mix and simplify licenses, reduce the prescriptiveness of our regulations and laws, and enhance consumer protection if we take enforcement seriously. Unless we invest in data infrastructure and financial literacy in parallel, no amount of capital provided to the financially illiterate and undisciplined will ever be sufficient to make informal lenders irrelevant.

Simply put, our thesis is that the private sector, along with lawmakers, law enforcers, consumer advocacy groups, and regulators, must first prioritize being effective in combating informal lenders while recognizing that doing so will require upfront investment in addition to some waste along the way. Migrating people from loan sharks to licensed lenders by allowing for higher interest rate ceilings also makes for bad optics and guaranteed public misunderstanding, but we see no other solution that does not include this element. This temporary reduction in popularity could potentially be offset by increased tax revenues that would result from NBFIs stealing market share from loan sharks – informal lenders don’t pay taxes. However, only after we have confidence in our progress should we strive to be more efficient in serving the underbanked and expect interest rates to decline.

When our chief risk officer joined NTL in 2007, title loans were dominated by small, localized players who ignored rules and regulations. At the time, NTL was an experiment in microfinance and the first bank-owned subsidiary to focus on title loans to motorcycle owners. Back in those days, competition and access to capital were limited, and the average motorcycle-backed title loan size was merely 9,000 Baht. The loan amount relative to collateral value (LTV) was also below 50%, and title transfers were required, which incurred costs and slowed down the process.

Over time, we popularized the title loan product, improved our risk management capabilities, extended our branch network, streamlined our loan origination process, scaled our collections operations, and reimagined the customer experience in a more fair, transparent, and convenient manner. Throughout this process, we helped establish the VTLA and advocated for higher financial education and standards. All of these factors led us and other industry players to grow, become more visible, and attract capital. Subsequently, we continued to drive down interest rates and extend loan tenors, thereby increasing affordability and reducing delinquency and repossessions.

By 2018, motorcycle-backed title loan clients benefited from lower interest rates, larger loan amounts were larger, longer tenors, and greater affordability. This is an example of how increased competition under rules and regulations naturally drives competition lower. In 2019, the Bank of Thailand formalized title loans and established a 28% interest rate ceiling, subsequently lowering it to 24% in response to the COVID-19 pandemic. By that time your company was already charging below the ceiling for car- and truck-backed title loans.

It is also worth noting here that the 24% APR I continue to reference is the maximum a licensed title loan operator can charge to service the existing base of title loan borrowers. We do not charge 24% APR for all customers; in fact, less than 10% of our company’s outstanding portfolio is charging interest rates at the regulatory limit. Our blended portfolio yield is around 18%, and the lowest interest rates we offer are around 12% APR. Our pricing schemes are designed to vary by customer segment and are adjusted to reflect the cost of risk and the cost to serve.

Unfortunately, there will always be groups of customers who we must turn away. While I would contend that the overwhelming majority of borrowers have the intention to repay their loans, not all of them have either the capacity to repay as much as they want to borrow or the financial discipline required to do so. The self-employed and underbanked are commonly labeled as being financially fragile for a reason, and because the nature of their cash flows will never be as predictable and stable as those of salaried employees, they will always tend to be riskier and costlier to serve

Our branches are frequently visited by clients who require a loan but are either too risky or too costly to serve at 24% APR. These rejected applicants are likely to wind up borrowing from informal sources at significantly higher rates with less-than-fair terms. The space between the maximum rates that NTL charges and what unlicensed moneylenders charge provides the room to increase interest rates and, by extension, promote financial inclusion and quality of life. We reason simply that it should be preferable for vulnerable clients to borrow from licensed players who are supervised and regulated, providing greater transparency and through legal means at rates exceeding 24%, than to be completely excluded from the formal financial system. This option should also be preferable for the government because data from licensed lenders would give them more visibility on the health of the economy.

There would be fewer loan sharks in Thailand if we allowed well-intentioned private operators who have the know-how, reach, technology, and capital to charge interest rates beyond 24% APR but well below the nearly 100% APR that loan sharks are charging. Those who are granted this right to lend beyond the 15% stipulated in Thailand’s Civil and Commercial Code should pass fit and proper screening and be subject to regular supervision and enforcement. We advocate for a near-term strategy of stealing market share from loan sharks and improving conditions unrelated to interest rates first while, in parallel, investing to improve borrower education on the importance of treating their credit histories as valuable assets. Once the data infrastructure is robust and financial education widespread, the friction and cost associated with assessing and cultivating creditworthiness will decline, and competition will naturally drive good players to gain scale and eventually compete harder on interest rates to grow.

We recognize that there is no such thing as a perfect or final version of a financial system. This section was written with a narrow focus on financial inclusion and, thus, ignored all of the other economic, social, and environmental priorities, friction, and pressures to which public officials must attend and overcome. I referenced and opined on existing government initiatives when proposing solutions because our goal is not to reinvent the wheel or claim credit for these ideas but rather to contribute to the financial inclusion discussion by filling in some blanks, connecting some dots, making our position known, and hopefully keep the impact conversation going.

I will conclude this section by explaining why we invested so much time to communicate our views on this topic. Author Mark Twain once famously said, “The two most important days in your life are the day you are born and the day you find out why.” After we discovered our purpose in 2016, we recognized that our stakeholders’ multiple objectives could best be achieved by shifting gears from being an organization that just wanted to win against loan sharks and other competitors to becoming one that stepped up to lead.

At Ngern Tid Lor, in everything we do, we strive to empower people and enrich lives. We believe that access to fair, transparent, and responsible financial services is everyone's right. We deliver financial betterment by offering relevant products and services that are simple to understand, convenient, and fast through our committed employees.

- Ngern Tid Lor’s WHY was crafted by employees in 2016

HOW LAST YEAR’S ESTIMATES HELD UP:

We were approximately accurate in expecting a mean reversion to pre-COVID-19 dynamics but were surprised by a few more developments.

As anticipated, the business and financial landscape in 2023 was unfavorable and seemed to be a continuation of many processes and policies that were implemented in response to the COVID-19 pandemic. Internationally, rate hikes by the US Fed continued to send waves throughout the financial markets globally, making the cost to refinance maturing loans more expensive and capital generally harder to raise. Consequentially, several financial institutions’ weaknesses were exposed, and they were driven to insolvency. Most notable among these internationally were Silicon Valley Bank, Signature Bank, and First Republic Bank in the United States, and Credit Suisse in Switzerland. The geopolitical tension between the US and China, as well as Russia and Ukraine, persisted, with the longstanding conflict between Israel and Hamas erupting to add more instability to an already volatile environment.

Domestically, Thailand observed slower-than-expected GDP growth, attributed to several unwelcome developments. First, the tourism-led recovery upon which many businesses, economists, investors, and analysts had pinned their hopes failed to materialize on time. Without tangible recovery in such a large and distributed element of the economy, household debt to GDP remained stubbornly high, hovering around 90% at the end of the third quarter. To compound the situation, many corporate debt defaults, bankruptcies, and scandals committed by stakeholders of publicly listed companies came to light, further shaking investor and creditor confidence. These types of events were not surprising and are expected occurrences during a credit-tightening cycle. Adding to the lack of economic catalysts was political turmoil, which further delayed government spending and stimulus.

The aforementioned incidents understandably impacted the already hesitant investor sentiment about Thailand. As a result, the SET was one of the worst-performing markets in Asia. Suppliers of debt financing also became less generous and more demanding across the board. Smaller and mid-sized companies appeared to experience funding shortfalls, unable to compete with larger corporates that issued debentures at record levels. This is evidenced by the many low-grade debenture issuances that closed without being fully subscribed. We noticed that to meet their maturing debt obligations, these weaker companies resorted to borrowing more frequently at increasingly high yields while also shortening the borrowing tenor. While they survived to fight another day, the refinancing risk for these operators has likely increased, making the market more precarious.

Recap of title loan, insurance brokerage, and adjacent industries

Among title loan and auto-backed lenders, we witnessed many seasoned operators struggling to grow earnings. Specifically, their net incomes contracted due to rising financing and credit costs. Past decisions to throw caution to the wind in exchange for short-term earnings growth came back to haunt most operators. Additionally, new branch openings also appeared to slow as most companies focused on cost reduction and improving portfolio quality.

However, these dynamics did not seem to deter some enthusiastic newcomers, mostly formed bank subsidiaries. The initial fear that price wars would be instigated by these well-funded market entrants has yet to materialize. We believe such actions would defeat the purpose of banks entering this market since what attracted them was potentially higher returns. Furthermore, while title lending looked easy during economic and capital market upcycles, the current challenges introduced by entrenched incumbents, elevated costs of funding, higher risk, and employee turnover are weighing on all operators. The “shake-out” phase of the title loan industry cycle whereby winners will emerge and weaker and outdated players will start to disappear appears to be on the horizon.

Meanwhile, upstream in the hire purchase (HP) industry and the impact of new interest rate ceilings imposed by the Office of Consumer Protection Bureau (OCPB) began to materialize. While the overall number of new motorcycle registrations grew by 4%, an examination of the quarterly figures was much more telling. New motorcycle registrations’ year-on-year growth for Q1-Q4 was 14%, 7%, 0%, and -3%, respectively. Aligned with this declining trend, we have heard anecdotes of motorcycle dealers exiting the business due to unsustainable economics.

The OCPB regulation also impacted buyers of used cars, especially those who were less creditworthy and could only afford to buy older,-aged vehicles. These buyers mostly purchase older vehicles to use as a necessity, often to support income generation. Used car HP lenders’ problems were compounded by the entry of EVs as a substitute option for consumers. Consequently, these developments also delivered shocks to used car dealers. Making car ownership less accessible to the most vulnerable segments of society and driving local dealers out of business are likely unintended consequences of the well-meaning initiative. These trends should be monitored and are potentially a good case study on the impact of interest rate caps.

Truck hire purchase operators appeared to be pulling back from their own core businesses, presumably slowing down due to difficulty in fundraising and higher credit costs driven by a weaker underlying economy. The new truck market shrank by around 6%.

One negative surprise that we missed in our forecasting was the dramatic decrease in the auction price of repossessed cars as the unwinding of the debt forbearance policies took form and the substantial increase in the supply of used cars, flooding the auction houses and used car dealership lots. The indicator that we didn’t monitor closely enough was the inventory levels of used car auction houses. These figures ballooned to an average of 25,000 cars sold per month from 10,000 cars sold per month the prior year. If we look back beyond one year, the pre-pandemic number of vehicles sold at auction stood around 15,000 per month. I believe we are witnessing a mean-reversion of auction vehicle inventory, levels which were depressed between 2020–2022 due to COVID-19-related aid programs. It will take a while for the market to absorb this inventory, and prices are likely to stabilize sometime later in 2024.

Electric vehicles (EVs) imported from China were another reason we experienced lower-than-expected recoveries from our repossessed vehicles. More on this in the next section. Our loss on sales in some four-wheeler segments reached a high of nearly 50% toward the end of the year, substantially higher than pre-pandemic levels of 24–38%.

Last year, I explained how difficult it is to compare performance across NBFIs without having detailed insights into their risk management and accounting policies and practices. That challenge persists, worsened by the continuation of the COVID-19 aid policies, which allow lenders to re-age delinquent borrowers’ loans and delay asset repossessions. Unless lenders set aside additional provisions for these reclassified borrowers as “management overlay,” the impact would materialize in the form of artificially depressed credit costs, inflated profits, and other misleading balance sheet entries. To be clear, our discontinued these types of debt relief campaigns in 2022 in an attempt to put the direct costs of COVID-19 behind us.

Interest in insurance-related businesses appears to be increasing, with insurance companies merging and new brokers and platform players being established. In particular, lenders who struggled to perform in their core loan business began looking toward insurance distribution as a possible solution. Likewise, insurance brokers began trying to monetize their customer bases by starting to lend. The trend toward convergence across adjacent industries that we described last year appears to be continuing. Finally, the year for insurance ended with a somber reminder of the importance of risk management. In December, the Office of Insurance Commission (OIC) suspended the operations a major insurer after the Central Bankruptcy Court revoked the company’s rehabilitation petition. This well-established insurer wound up as probably the last casualty of the ill-conceived COVID-19 lump sum payment policy.

In summary, while we could not anticipate with precision the actual events that had occurred, the 2023 landscape and sentiment looked close enough to and felt like the turbulent situation for which we had prepared.

SIGNIFICANT UNEXPECTED DEVELOPMENTS:

The Invasion of Thailand by Electric Vehicles

Before the last quarter of 2022, seeing an EV on the road in Thailand was a rare event. They were mostly sold by third-party importers, with only a few authorized distributors. That niche positioning of EVs changed seemingly overnight, sparked by Tesla officially entering the Thai market and selling thousands of vehicles within hours of being launched and 7,739 vehicles throughout the December 2022. Subsequently, we saw several new Chinese manufacturers entering the Thai automotive market with competitively priced EVs. These companies were able to benefit from a Free Trade Agreement (FTA) that eliminated import duties on certain electric vehicles manufactured in China. Our understanding is that the spirit of this agreement was intended to promote trade between the two countries and envisioned golf carts and warehousing machinery as the main trading product. EVs were understandably not on the radar when the treaty was signed in 2003, five years before Tesla began production on its first car. Subsequently, in 2022, in a push to both endorse Thailand’s commitment to combat climate change and make the competitive field for EVs more level, additional policies were passed to reduce tariffs on electric cars regardless of their source of production.

Consequentially, the Thai automotive market exhibits an unusual dynamic where the sticker price on a new EV is lower than on a comparable internal combustion engine (ICE) car. This is in contrast to other markets, such as the US, where the opposite is true. This market distortion, enabled mostly by the FTA loophole, boosted the attractiveness and affordability of EVs and accelerated their adoption. The already lower prices of EVs were further supported by the Thai government’s EV 3.0 policy that provided direct subsidies for buyers of EVs. There is also an EV 3.5 policy expected to promote a longer-term aspiration of making Thailand an EV production hub. In 2023, EVs accounted for 9% of all new registered cars sold and exhibited a growth rate of 690%.

The aforementioned statistics notwithstanding, we believe it may be too soon to sound the alarm on any immediate risk or opportunity. For context, at the end of 2023, Thailand had approximately 89,165 registered EVs against a total base of nearly 19 million registered cars. That’s 0.5% penetration.

We believe the demand witnessed over the past 15 months has been driven partly by impulse purchases of upper- and middle-class early adopters. Slick exterior designs, fully loaded interior features, relatively low price points, and fashionable trends have understandably made EVs an attractive choice for car buyers; however, consumers would be prudent to pay attention to what happens after the initial purchase process. The car ownership period will last for years, and because they are new, the drawbacks and costs of owning an EV have yet to be widely understood and appreciated.

Fundamentally, the automotive market relies heavily on an ecosystem with specific infrastructure and features such as refueling stations, skilled mechanics, a vibrant second-hand market, and appropriately underwritten and priced insurance policies. Most of these elements remain underdeveloped in Thailand. Adding to the complexity of the purchase decision is the need to consider the lifetime cost of ownership. While owners of EVs benefit from avoiding oil changes and less maintenance, those savings are offset by a faster tire replacement rate, low-value retention (higher depreciation), higher insurance premiums, and longer repair times in case of an accident.

Once EV producers and sellers help the market participants overcome the aforementioned economic considerations, they face another challenge: range anxiety. Basically, the fear that a car will run out of fuel before being able to get to a charging station is still a barrier to widespread adoption.

Imagine being stuck on the road in an EV on the notorious pre-New Year and pre-Songkran holidays when it sometimes takes eight hours to get to Nakorn Ratchasima due to traffic. Typically, this 260-kilometer, hilly terrain takes three to four hours on a normal weekday. How many charging stations are there along the way, and along which segment of the trip will you face congestion? Even if you could reach   a charging station before your battery ran out, what would the queue look like for a 30-minute fast-charging experience compared to a 5-minute gas fill-up? How many hours would you have to wait for your turn because there are no alternatives nearby? What if the charging station you reserved via an app was malfunctioning when you arrived? What if you saw an interesting roadside restaurant and wanted to make a stop but already reserved time at a charging station 100 km away? Without a more robust charging network, a long-distance family car trip in an EV requires methodical planning for such a trip to go smoothly—not exactly a formula for a flexible and anxiety-free vacation, which is one important utility of car ownership.

Since EVs are a relatively new phenomenon in Thailand, we can look to more developed geographies, such as the US and EU, to glean insights. Interestingly, in the US, a market that has the above-mentioned infrastructure elements in place, EV sales seem to have plateaued. Hybrids are now the hottest-selling engine type and seem to be the preferred and balanced value-for-money option for car buyers. Meanwhile, the EU has a much more active EV market because government policies are more insistent on carmakers selling EVs. Last year, EVs were around 7% of the outstanding registered vehicles in the US compared to 12% for the EU.

For now, our view is that EVs are the car market’s equivalent of the gadget of the month. We believe that once the initial hype tapers, time will be needed for the technology to mature and the requisite infrastructure to be built. Government policies around the FTA and subsidies could also change. Since this phenomenon will not likely be an immediately disruptive force, we will remain vigilant and closely track the composition of the car market to maintain an updated view so we can adapt accordingly. The first EV-backed title loan has already been originated by your company.

The year AI went mainstream

In (month) 2023, OpenAI’s ChatGPT was introduced to the world, and within a matter of days, it reached 100 million users (confirm dates and stats). Within months, additional upgrades were released, which moved beyond text generation and enabled the synthesis of photos and video production.

While AI and machine learning have been buzzwords in the tech and business community for years, the feature that I believe enables this version of the technology to truly be disruptive is its user-friendliness. Being able to interface with Generative AI (GAI) technology using natural language rather than computer programming language has eliminated a lot of the friction of having to be technically fluent and has essentially made AI accessible to everyone, resulting in immediate productivity and creativity gains globally.

To appreciate this, one only has to take a look at the content being posted by non-technical users on social media today compared to a year ago. Much of the content we see nowadays would have taken computer graphics specialists time, effort, and money to create. Today, a few well-crafted prompts by curious but non-technical users into Midjourney, ChatGPT, or any other AI-enabled apps can yield magical output.

Your management team and company are excited by the potential for this technology to create further separation between NTL and more traditional competitors in the lending and insurance brokerage businesses. Without revealing too much about our views, internal activities, and methods, I can assure our shareowners that within the walls of NTL, we are actively experimenting with GAI. We have tinkered with use cases across the organization in areas such as finance and accounting, fraud, customer service, branch management, software development, and marketing and sales.

The enabler to unlocking the benefits of this technology, naturally, is data. Fortunately, this is aligned with NTL’s data-driven approach to business building. It also helps that we have consistently invested in self-service digital touchpoints that, besides enhancing customers’ convenience, generate more data. With GAI, we expect it will be easier and faster to sift through the data we have for new insights. Simply put, we anticipate our data flywheel to accelerate and spin with greater velocity.

Later, once the technology becomes more mature, the dust has settled on the enterprise solutions arms race between the likes of OpenAI, Salesforce, Microsoft, and Google, and the potential benefits we dream of are realized, we will share in greater detail how we deploy this technology to improve client experience while optimizing revenues and costs for shareowners.

Finally, my greatest source of comfort in leading NTL through uncertain times stems from my deep confidence in my colleagues and the exceptional working environment that we have cultivated. I believe few organizations have assembled a leadership team that demonstrates the combined traits of ownership mindset, adaptability, openness to learning, comfort with technology, risk awareness, and execution orientation that we have. I thank the leaders of NTL for their endless energy, curiosity, compassion, dedication, and commitment that they displayed throughout 2023 to ensure the best possible outcome for our organization. I hope the over 60,000 individual and institutional investors who co-own Ngern Tid Lor Public Company Limited share my pride in our company’s past achievements as well as my optimism for our company’s prospects.

P.S. GAI was not used in the drafting of this letter. The AI companies will need to regularly update their models with new content. Hopefully, your company’s ideas and values will make it into the training set and help shape ideas and the discussion on how to move the discussion around poverty alleviation and inequality reduction forward.