Two recent Thai Supreme Court decisions have sent jolts through the Thai banking industry by ruling that imposing the maximum default interest, which exceeds the maximum regular interest rate, as a blanket rate in loan documentation, voids all interest under the documents.
Most loan agreements in Thailand involve two types of interest rates: the regular or normal interest ("normal interest") and default interest. Since interest rates are variable, as a matter of convenience, it has become common practice for commercial banks to stipulate in the loan agreement only one interest rate, i.e. the maximum default rate, which is usually higher than the normal interest. However, two recent court cases have changed the way in which interest rates should be specified in loan and other relevant security agreements.
In the first case (Supreme Court Judgment No. 4044/2550), the borrower entered into loan and mortgage agreements with a commercial bank. The borrower agreed to pay interest at the rate of 19 percent per annum - the maximum rate which can be charged by a lender in the event of a default according to Bank of Thailand ("BOT") rules. When the borrower defaulted, the bank claimed for debt repayment with interest at the rate of 19 percent per annum.
In the second case (Supreme Court Judgment No. 5480/2550), the borrower entered into a mortgage with a commercial bank which had announced its normal housing loan interest rate at 13.75 percent per annum to comply with BOT rules. The loan agreement, however, expressly stated that the borrower was to pay interest at 19 percent per annum and that the bank had the right to adjust this rate as it deemed appropriate. On several occasions the bank exercised this right and increased the interest rate to as high as 24 percent per annum - a rate usually reserved for defaulting credit card holders. Eventually, the borrower defaulted and the bank filed a claim.
The Supreme Court Decisions
In both cases, the Supreme Court found in favour of the borrowers. It held that by imposing the maximum default interest rate on non-defaulting customers, the banks were charging usurious interest rates and had therefore acted unlawfully and contrary to public interest.
The Supreme Court ruled that when the borrowers entered into the loan agreements and agreed to pay all interest demanded by the banks, they did so trusting that the lenders, being commercial banks, would impose just and proper interest rates. Consequently, the banks could not argue that the borrowers had agreed to the terms of the loan agreement and should therefore be bound.
The Supreme Court held that the usurious 19 percent annual interest rate voided all types of interest accrued under the agreements. The default interest clause was therefore taken to have never existed and the banks could only be entitled to the statutory default interest of 7.5 percent per annum starting from the date of default.
The Supreme Court decisions have changed the way banks in Thailand charge and specify interest rates in loan agreements by requiring banks to explicitly stipulate both types of interest rates - the normal interest and default interest - in their loan agreements. Commercial banks whose standard loan agreements provide the maximum default interest rate as a blanket rate are strongly recommended to revise these agreements to avoid the possibility of forfeiting interest income.