Loan sharks are a plague in Thailand. The government wants to try something new to fight them

THE offence was minor, but the reaction violent. Because a woman had missed payments on an informal loan for two days, the loan shark sent in his thugs: armed with machetes and metal pipes, they raided the woman’s house, smashed furniture and beat up two men living there (the person they were looking for was not at home). The attack, which took place in late August and was caught on surveillance cameras (see picture), highlights a growing problem in Thailand: more and more people are turning to loan sharks, particularly in rural areas. Rapid economic transformation is turning those who live there into consumers who aspire to the same luxuries as their urban compatriots. After spending a fair bit of time and effort to stabilise rural incomes in the face of plummeting agricultural prices, the government of Yingluck Shinawatra, Thailand’s prime minister, has now turned its attention to dealing with predatory lending practices. It is part of a wider effort, set in motion by her predecessor, to reform state-dominated rural credit markets.

Thailand has made great strides in improving access to financial services: 73% of the population now have a bank account and only 3% have no access to formal finance whatsoever. But lending by loan sharks has proved hard to stamp out.

One reason is that Thais like to keep things informal: the country’s shadow economy accounts for more than 50%of GDP--the highest share in Asia. More important, household debt has been surging. According to Standard Chartered, a bank, household borrowing as a share of national income in Thailand now stands at 68% of GDP, much higher than other middle income countries such as China (20%), India (18%) and Indonesia (17%).

To make life harder for loan sharks, the government wants to adopt a counterintuitive measure: scrap an interest ceiling that has been in place sixty years. The cap prohibits registered non-bank lenders from charging more than 28% interest per year (including a 13% service charge). The idea is to encourage non-banks to provide formal credit to poor households. These institutions are typically community-based groups founded by the ministry of interior, NGOs, local governments and monks. The cap means that it is not economical for these groups to get into rural lending: Thailand is a vast country and delivering financial services in remote areas is costly.

A Thai loan shark typically offers two lending schemes: A borrower can just pay interest of 2% per day every day for 24 days or repay the principal plus 2% daily interest in equal instalments. Both are terrible deals. Switching from a shark to a sound non-financial institution could save a household as much as 25,000 Thai baht ($800) per month on a loan of 100,000.

How many people could benefit from making lending profitable for non-financial institutions? Korn Chatikavanij, an opposition politician and former finance minister, reckons that as many as 2.5m people could be better off—roughly double the number that came forward to participate in a scheme to refinance loan-shark debt under the previous government.

Mr Chatikavanij recalls a meeting with the country’s 250 biggest loan sharks (“some of them had to leave their guns outside”). The idea was to explain to the men running Thailand’s informal lending operations that they should view the refinance scheme as an “equity injection for their clients rather than an attempt to put them out of business,” in the words of Mr Chatikavanij.

But there was “sanity in all the madness”, he says. The loan sharks reported that their profit margin—after paying off all the people that needed paying off—was not much higher than that of a credit-card issuer. Then again, just like many legitimate lenders, they have no incentive to be open about how much money they really make.