Risk Management

Pandemic Risk

Since the rise of the COVID-19 pandemic, the economic recession and lockdowns followed. People started to adopt a new normal in which social distancing is widely encouraged. Activities, including business transactions, are also affected resulting in customizing customer behavior to have exposure to technology. Initially, people are not inclusively familiar with smartphones and online transaction, especially those with lower income or living in rural area which accounted for majority of the company’s customer base. However, the government has leveraged the COVID-19 situation to encourage people nationwide to have access to digital transactions via many government’s subsidy campaigns, thus, equipping wide population with the exposure of digital transformation. As a result, people are getting used to the convenience of staying at home and remotely process transactions anytime, anywhere.

In the long run, it may affect customer behavior modification in payment. As the customers avoid entering to use the service at the branches, the sales of other products decrease. Besides, in the social dimension, the main business operation of the Company is to lend with the assets as collateral. The asset review and valuation are an important hedge step. Additionally, the new normal which may shape customers behavior to adopt and be familiar with technology would discourage the customers from willing to come to branches and push the company to rush in digital transformation in order to sustain customers.

Furthermore, the intense competition, especially during the time of COVID-19 situation with high pressure from regulators and stagnant economic condition, the interest rate has been significantly affected. In terms of regulators, there has been several policies to lower the ceiling rates in many loan products resulting in the lower margin for many loan providers. On the other hand, the big players in the industry started to intensely lower to rates across many products to compete with each other. In the long run, this phenomenon may set the expectation for customers to get used to the perception of low interest rate structure.

1. The Company has urgently announced policies and measures to prevent the spread of Covid-19 for all levels of employees across the country to follow in order to protect themselves and customers from the outbreak and exposure in the Head Office and branches all over the country.
2. The Company cooperates with the Bank of Thailand in issuing the financial assistance measures to customers in order to minimize the impact on loan quality and sustain the customers.
3. The Company raised fund by issuing bonds to retail investors (Public Offering) in the amount of 9,000,000,000 baht in the second and fourth quarter to manage liquidity. This also included borrowing of Soft loan from Government Savings Bank in the amount of 4,958,000,000 baht at an interest rate of 2% per annum for a period of 2 years.
4. The Company has updated mobile application Muangthai Capital 4.0 to be able to support the function of requesting additional credit approval. It is expected to be available in 2021 for expanding online payment channels and accommodating the changes in customer behaviors in the future.
5. The Company improves the auction process for assets in the Company’s auction center to avoid exposure in compliance with the Social Distancing Policy. This increases the overall asset auction efficiency and effectiveness. As a result, the average asset selling price becomes higher when compared to before the improvement.
6. In terms of the interest rate pressure, the company has always been positioning ourselves as the cost leadership and disrupted ourselves by charging the significantly far lower rate than the ceiling rate. Thus, there is a minimal impact to the company.

Non-Conventional Competitor Risk

Since the Bank of Thailand revised the personal loan business license under supervision to supervise the vehicle title loan business and the provincial retail credit business license under the supervision of the Ministry of Finance, the small financial service providers, FINTECH technology developers, including financial institutes both national and international pay attention to the microfinance business. This possibly creates even more intense competition in the industry including competition with technology, expansion of loan products, new microfinance, or even price competition in the future. As the Company is well aware of changing, the preparation is made. The strategies and operational plan are changed in order to be able to cope with and compete in the industry strongly.

1. As the company’s main target customers are low income, unprivileged, and low exposure to technology, the company is focusing on providing a fair interest rate and having the most customer coverage via aggressive branch expansion to answer the pain point of customers who are likely to use the loan service near their houses with convenient traveling. The company is planning to expand to every Tumbon (villages) in Thailand, except for the 3 southern border provinces.
2. Furthermore, in order to tackle unconventional competitors such as FINTECH, the company has also begun to adopt digital transformation organization wide to prepare with the change. The company has been in the process of developing the application, Muangthai Capital 4.0 in response to the emerging demand of the customers from the new generation.

Climate Change Risk

One of the important concerns on the environmental aspect associates with the foreseeing environmental regulations. Since there is a rising trend on the significance of environmental laws in other developed countries such as carbon tax. We are seeing Thai authorities paying more attention to this aspect and are expecting to introduce these regulations soon. The potential impacts will include the charges in direct and indirect taxes and more subsidies to encourage green businesses.

1. In order to prepare for the foreseeing environmental regulations, the company has started to track the energy consumption in order to record the carbon footprint. Moreover, the company has set the key target to reduce the usage of paper, fuel, and electricity consumption organization-wide as the action plan to lower the total amount of greenhouse gas emission including Scope 1, 2, and 3 by 10% within 2023.

Conventional Competitor Risk

The company has been operating in the microfinance sector for over 28 years and counting. The intense competition in the industry landscape pressures the players to LEAN down in every aspect both in terms of costs and yield. Furthermore, the current economic situation pushes competitors to aggressively acquire customers whether through branch expansion, promotions, dumping interest rates, cross-selling products, etc. These issues are narrowing down the margin gap and challenge many companies’ ability to efficiently manage costs while balancing with the structurally lower yield.

1. The Company has established the standard of service excellence including the practices in accordance with the rules related to the Market Conduct as a guideline for the Company’s operation. This is part of the employee’s performance index. For the service excellence policy, the Company has changed the form of competition in the microfinance loan industry entirely by helping to reduce the conflicts and unequal serving of customers. Moreover, the emphasis on providing excellent service has resulted in existing customers returning to the service again and telling it to new customers (Snowball Effect). This is an important marketing strategy of the Company.
2. In order to meet the needs of customers and approach more customers, the Company has continued to expand the retail portfolio of loan products continually. Before being listed on the Stock Exchange of Thailand, the Company only had motorcycle registration loans. After entering the Stock Exchange of Thailand, the Company added vehicle title loans, vehicle title loans for agriculture, land title deed loans, unsecured personal loans, and Nano Finance loans, respectively. The Company has recently expanded motorcycle hire purchase loans to existing customers who have a good history of payment of the Company with the belief that the new products will accelerate the growth of the portfolio, outstanding loans, and the interest receivable rate of the Company in the future. The customer loyalty of the Company is also developed.
3. For the fair and transparent interest rates and fees under the Personal Loan Act under Supervision, the maximum interest rate is 25% for unsecured loans and not more than 24% for vehicle title loans. This is a factor driving the interest rates of new industries down from the past at the average rate of higher than 30%. However, the interest rate of the Company is averagely around 22-23% over many years. In 2020, the company reduced the interest rate to around 21-22% which is lower than the new maximum regulated interest rate. This is for creating the fairness to the Company’s customers who can maintain the good credit status and debt quality in order to attract new customers from informal loan providers including other service providers.

Cyber Security

The current rapidly developed technology causes the cyber threats to affect all sectors in the economy and national security. The financial industry, financial institutions, and financial service providers are also threatened by such risks. The impact becomes more severe both in the probability and magnitude of the effects which may come in evolving ways and are difficult to prevent or detect. Even though the operation and business model of the Company mainly deal with the tangible assets and offline cash transaction, the process in recording the sensitive information of the customers is in the form of digital. Therefore, the Company is exposed to cyber security risk.

1. Establishing cyber security policy including the measures to prevent and detect threats by opening whistleblowing channels and communication channels with customers both offline and online to enable the Company to detect cyber threats and find ways to prevent and solve problems promptly.
2. Creating corporate culture for stakeholders including third parties of the Company regarding the awareness of cyber threats continuously including monitoring of SMS messages by phone or electronic mail (phishing scam) and taking urgent action to immediately report the risks through the Company’s communication channels. In 2020, the Company has received notification on the Phishing Scam which does not directly cause any damage to the Company and there is no expense incurred from this whistleblowing. The Company has urgently acted to notify the whistleblowing on the Company’s website to prevent any stakeholder from believing the said Phishing Scam.
3. Setting the KPIs in order to tackle the risk as follows:
   • Downtime less than 24 hours
   • Recovery time within 24 hours
   • Cyber security incidents less than 4 times per year

Climate change has been occurring around the world and has a direct negative impact on the economy, society and environment. The impact is becoming more severe in Thailand. Climate is a major factor affecting agricultural products, which is considered the main source of income that drives the country’s economy. From the assessment of climate change in Thailand, it shows that the average temperature is likely to rise 1.5 - 2.0 degrees Celsius within the next 40 years, therefore it is very challenging for the agricultural sector. This has caused a direct impact to the company whose target group of customers is mainly engaged in agriculture. Climate emergency, therefore, may result in reduced incomes of farmers which will increase the demand for credit, on the other hand, the quality of the debt decreased.

1. The Company has expanded branches to various areas to reach a wider group of customers, such as the expansion of branches in Bangkok to balance the he customer base for customers who are not directly involved in the agricultural sector, or not being at risk from climate change as much as farmers’ groups.
2. The Company is well aware of the risk, therefore has implemented environmental policies since 2018 intending to reduce greenhouse gas emissions from direct and indirect business operations in the long run, such as the construction of a new headquarters building which is a green building (LEED Certified).