Southeast Asia is a diverse and culturally rich collection of nations, each at differing stages of economic development and each posing unique complexities in the banking sector. The region also holds enormous economic potential: Southeast Asia is one of the most rapidly developing regions in the world, with projected economic growth rates averaging 5.1% for member states of the Association of Southeast Asian Nations (ASEAN).
For banks operating in these countries - whether they’re multinational institutions entering the territory or existing local banks - there remain notable challenges, particularly when it comes to collections operations and debt recovery. Here are ten such challenges...
The debt landscape in Southeast Asia is incredibly dense and complicated. This is due to a litany of problems, and whilst there are a lot of different countries in the region at different stages of maturity, there are distinct commonalities. One of those commonalities is local regulations. The regulatory landscape in Southeast Asia is further complicated by the fact that many nations in the region are just now emerging from years of economic isolation. These nations have many laws and customs that are incompatible with typical western practices, not to mention their incredibly idiosyncratic court systems.
This is particularly problematic when it comes to debt collections. Indeed, in a report by Euler Hermes assessing local payment practices, court proceedings and insolvency, the region was found to have amongst the largest number of countries classified as ‘severely’ complex. Shifts in policy and initiatives such as the Debt Collections Act and the Debt Clinic set up by the Bank of Thailand are helping to regulate the way creditors collect the debt by banning unscrupulous collections tactics and giving individual debtors increased protection and rights. However, awareness and enforcement of the act remain low.
Another obvious commonality in the region is the problem of corruption, which remains a problem for banks to navigate. It’s not just emerging economies with this problem either, with over 40% of firms in the region expected to give ‘gifts’ to secure government contracts. On a local level, meanwhile, Malaysia’s 1MDB scandal has shaken the financial world in recent months, with a parliamentary committee identifying at least $4.2 billion in irregular transactions related to the company. The scandal also stretches to Singapore, with banking heavyweight DBS entered into various transactions that link it to 1MDB's shenanigans. Cambodia, meanwhile, scored 20 on the Transparency International Corruption Perceptions Index (CPI) - just 6 points above the notoriously corrupt North Korea. Vietnam scored 33, and while it is making strides to fight against corruption, there is still a mountain left to climb. Corruption is also still rife in Laos, with 99 targets or government agencies receiving financial aid or loans from foreign sources and the government losing up to $30 million to corruption.
Each is tackling corruption in their own way, but for now, the problem has a direct impact on debt collections. Corruption provides an incentive to unduly complicate the tax code and subject to many discretionary exemptions. Further, corruption renders tax collection institutions less effective and less efficient. With such shaky foundations underpinning a country’s governmental, economic and financial institutions, it makes the collection of delinquent loans that much more difficult. This means that a solid pre-collections strategy is absolutely critical and that debtors should be prevented from defaulting on their loans at all costs.
The Southeast Asian region has been dogged by some incredibly ill-disciplined financial regulations and spiralling debt. Vietnam suffered a major debt crisis in 2012, and many more nations in the region are potentially heading for a crisis in the near future. Another common problem countries in the region suffer from is lax rules and financial regulations that, from a debt collections perspective, generally lead to a hefty number of NPLs. Lax regulations leave banks open to crises and regulatory arbitrage (the use of regulatory loopholes to avoid banking costs).
However, things are slowly changing: The Vietnamese government set new targets for controlling NPL rates and capital adequacy requirements. The challenge now is to shake off the past and meet these new requirements. What is required by banks in the region is a regulatory recalibration. There is an opportunity for modernisation when it comes to regulatory compliance and for banks to integrate and align regulatory compliance goals with business strategy - from growth initiatives and operational simplification to risk management and cost-efficiency.
For debt collections to be fruitful and successful, there needs to be a strong level of communication between local collectors, banks and customers. If the infrastructure isn’t in place to support that communication then problems will arise. A modern debt collections infrastructure means investing in digital transformation, and many countries in the region might not be equipped to cope with the demands such a transformation entails. There are, however, encouraging steps being made, with many businesses relocating their data centres to the region and data centres are increasingly becoming core components of banking operations.
On the flipside, from an economic perspective, cities in Southeast Asia are booming, with Vietnam, Thailand and Cambodia all revealing a potential for significant long-term growth. Indeed, the flow of capital in the region was described as an “embarrassment of riches” in a recent report by PwC. However, with economies growing rapidly, people are rushing into the cities to fulfil the promises of better work and a better life and many of these cities are simply unprepared to cope with this massive influx. With rapid, unplanned urbanisation come other challenges too, as rents increase and the cost of living goes up. In this climate, bank customers might struggle to meet their debts and will need the help of their banks to stay ahead.
While there has been an increase in adoption overall with some countries in the region amongst the hottest spots for fintech growth, there are still some nations lagging behind on the tech front. Indonesia, for example, poses the issue of cultural acceptance, with online payments still viewed with distrust by many locals. This has led to an environment where credit card penetration is low and the adoption of online payments has been remarkably slow, which makes settling debts trickier for banks who would prefer to streamline and simplify their processes.
According to the co-founder and president of Indonesian e-commerce company Bukalapak, Muhammed Fajrin Rasyid, however, this slow adoption means that Indonesia (which currently boasts a young population of over 261 million) is poised as a “large and untapped” market. He explains: “Only about 10% of Indonesia’s population has shopped online.” This is primarily because they either don’t trust online payments or simply don’t know how they work. For banks hoping to invest in digital transformation in the region, then, the real challenge is in education and utilising user-friendly software solutions.
We live in a world where mobile banking apps allow us to transfer funds in seconds from our own personal devices. However, the identification tech that we might take for granted in the west is still falling behind in many Asian countries, many of which still rely on physical forms of ID. This reliance is problematic for collections teams, as paperless technology is not only more convenient for both the debtors and the banks, but saves costs and is more environmentally friendly.
Without the benefits of digital transformation, tracking debtors down is that much harder and user experience suffers. In Southeast Asia, there are also many countries where it’s common for citizens to have no official form of identification. This makes skip tracing (finding a debtor who has moved address) that much more complicated. However, there is progress being made. Back in 2001, Malaysia became the first country in the world to use an ID card that incorporated both photo identification and fingerprint biometric data. ID cards have also been standard in Indonesia since 2011 and in Thailand since 2018 thanks to the passing of the Digital ID Bill.
Collections strategies in the region still fall well behind their Western counterparts, with banks lending irresponsibly and not taking a long-term view on debt. In Cambodia, for example, only 4% of the population have formal savings, but 28% have taken out formal loans from a financial institution. Those figures simply don’t add up. As a result, Cambodia has major problems with small loans, with the average loan size in the country among the highest in the world. According to the National Bank of Cambodia, 2 million borrowers owe a record $2.8 billion.
10% of borrowers in the country are simply unable to pay their debts according to Ou Virak, director of Phnom Penh-based think-tank Future Forum. He explains: “While incomes have risen in the past 10 years, an economic decline could create an unsustainable environment while people are losing their jobs.” In such an environment, banks need to start being more selective with their loans and using the data available to them to approve or decline loan applications. They also need to understand that collections don’t start at default; it’s a whole lifecycle. More investment needs to be made not only in pre-collections but in preventing accounts from falling into delinquency.
Internet and smartphone penetration in the region is on the rise, with the region topping the charts in a 2019 report by WeAreSocial when it came to the growth of unique internet, mobile and social media users. With increasing digital penetration and cheaper mobile data, Southeast Asia is also the leading region when it comes to mobile data traffic growth, with data use growing by 29% in 2018. The data centre construction market in Southeast Asia is looking set to reach $2 billion by 2024, so now would certainly be the right time for banks to invest.
However, whilst there is more data than ever before in the region, that amount of data is not without its challenges, particularly in a region that might not be best equipped to handle it. In Southeast Asia, data centres are slow to build and costly to run. They are also vulnerable to cyber attacks, system failures and power outages – issues that plague many emerging economies. As such, it’s vital that banks looking to invest in the area prepare their debt collections practices accordingly and invest in stable digital infrastructure.
A challenge unique to Western banks looking to increase their presence in Southeast Asia is the cultural translation of their services and debt recovery processes. We’re not just talking about translating the language either. There are numerous specific cultural sensitivities to take into account - from the religious to the negative connotations surrounding debt collections due to a history of agencies in the region using third-party force. It’s vital that banks are able to customise their tech to cater to the cultural needs of their local customers.
There is also the opinion that cultural differences could be a barrier to digital transformation in the region. Particularly for debt collections practices, customers need to understand that identities are no longer tied to pieces of paper and that there are plenty of robust and regulated digital identity services emerging that have the flexibility to attend to their cultural needs and work with local collections strategies.
The region’s economies are undoubtedly growing, with real GDP growth across the board in most nations. However, with growth comes the challenge. The countries of Southeast Asia still need to face up to the challenges that affect debt recovery efforts and they need to do this by:-
● Maximising the opportunities and mitigating the risks of financial technology.
● Strengthening export performance amidst rising protectionism.
● Mitigating the risks of natural disasters.
● Monitoring the pace of monetary policy in advanced economies, along with geopolitical tensions and trends.
● Enhancing financial literacy to help maximise the use of financial tech products as well as managing risk at the household level.
● Mitigating the downsides of broadening trade protectionism via continued progress in structural reforms.
There are undoubtedly challenges facing those banks looking to make an impression in Southeast Asia, but with such enormous economic potential, it’s certainly worth the effort. Whilst it might appear as though the challenges above offer a few significant hurdles to overcome, the majority of them can be comfortably navigated given the right tools and the right approach.
Ultimately, debt collections is always going to be a subject that will impact different countries in different ways relating to their economic and cultural climates. Underneath it all, though, they are all looking to make the process as painless and as friendly as possible and that’s something all banks, regardless of their size or their country of origin, should really be taking to heart.
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