The SME client segment, which makes up 39% of Thai commercial bank lending, has driven an increase in impaired loans at Thai banks over the past three years. An improvement or stabilisation in this segment should therefore positively affect overall asset quality, help lower provisioning requirements and contribute to a turnaround in the banking sector's non-performing loan cycle.
However, the country's economic recovery is not fully entrenched and downside risks remain. A drawn out and severe downturn could lead to renewed impairments, since the SME sector is more vulnerable to muted business conditions and has lower financial buffers than large corporates. Nevertheless, this is not Fitch's base case scenario, which envisages stable growth for the Thai economy in 2017 and 2018.