In many Southeast Asian countries bankruptcy is still seen as one of the great taboos and the idea of owning up to one’s debts is frowned upon.
From a cultural perspective, admitting any flaws, weaknesses or imperfections goes against the region’s social norms, and bankruptcy just might be perceived as the ultimate failure by many. This is why there is such a grey cloud around it in Asian culture, particularly in Asian banks.
But what are the implications of this fear? And how could banks in Southeast Asia be improving their debt collections practices in response to it?
Knowing the fear
Nobody makes a plan to file for bankruptcy but it can be an unfortunate inevitability. In certain circumstances (from a purely logistical perspective) it can even be the best option for a person’s finances and health. Michael Hobbs, the president of PahRoo Appraisal & Consultancy - a US real estate valuation and consulting firm, said: “Those I’ve spoken to said filing for bankruptcy was gut-wrenching, but also therapeutic, because the pain came to an end when the filing was complete.”
However, while those in the West - particularly in America - have learned to accept the realities of bankruptcy (or insolvency), there is an inescapable cultural shame that still circles debt throughout Asia.
Education (or a lack thereof) is partly to blame here and has led to a banking culture that lags quite far behind most Western peers. In Cambodia, for example, according to the World Bank, the percentage of Cambodians aged 15 and over with a bank account stood at just 22%. Only 4% of Cambodians had formal savings, while 28% had taken out formal loans from financial institutions.
That means more Cambodians have taken out loans than actually have active bank accounts. In such a climate, debt collectors are bound to struggle, as they are tasked with collecting money from debtors who are essentially ‘off the grid’.
Improving financial literacy should be critical for both households and businesses - especially small businesses and those based in rural areas. A decent amount of financial knowledge will not only help debtors to understand their rights and responsibilities but protect themselves from financial fraud or over-indebtedness.
Understanding the fear
With the fear of bankruptcy so rife in the Southeast Asia region, it could be perceived as a positive for creditors, as fear is always a powerful motivator for avoidance. However, whilst the fear might be palpable, there are still a rising number of individuals and companies falling into it, even in the more developed countries like Singapore, where there were 3097 fresh bankruptcy orders made in 2018 (up from 2587 in 2014).
The introduction of the Insolvency Order in Singapore could be seen as a sign of shifting perceptions towards insolvency in the country. The order places greater emphasis on reviewing and rehabilitating companies that are facing shortfall and difficulties, allowing a company to restructure their debts or restructure management as an alternative to liquidation.
Whilst this order doesn’t help private debtors, it does go some way towards taking the stigma and the shame away from bankruptcy and shows that it is possible to bounce back from. Banks should be open to not only getting behind positive shifts in governmental policy but keeping on top of them so they can adapt their collections strategies accordingly.
Accepting the fear
The frugality of the Asian market is a false pervasive belief that lingers around the global economy. This is largely down to the culture (the self-discipline of Confucianism) and a history of privation amongst developing countries. It’s this culture and this history that might have led to such grave fears surrounding debt. However, relative to income levels, consumer borrowing has risen steadily in Thailand, Malaysia, Hong Kong and Singapore in recent years.
In Thailand, the household debt of $372 billion represents 77.6% of GDP. In Malaysia, meanwhile, official estimates placed household debt at 88.4% of GDP in 2016. In order to release the debt pressure, the Thailand central bank has already stiffened the rules on credit card and unsecured loans by reducing credit limits as asset quality pressures mount.
To help lighten the load in Malaysia, the central bank started to tighten lending standards in 2016, paving the way for some adjustments in loan disbursements. A new consumer credit law is also being formulated to enhance protection of borrowers and establish responsible and fair lending practices, debt relief, disclosures and debt recoveries.
If we can understand the local and regional attitudes towards debt then we will be better equipped to design more effective debt collections responses around them. Of course, the region is vast and eclectic, with various disparate economies and individual cultures to navigate. However, by relying more heavily on customer-centric practices and digital transformation, banks might be able to demystify debt collections a little and cast away some of the shame surrounding it.
What it all means
If banks in the region want to combat this fear, they need to start by educating locals and reevaluating their own local debt collections practices. Education can be as simple as making sure customers are aware of the implications and the consequences of personal insolvency. It also means stringent checks on individuals applying for loans, ensuring they truly have enough money to cover their personal loans or credit.
They also need to start approaching bankruptcy not from a moral perspective, but as a purely financial one. a solution that can be an incredibly powerful tool for debtors who feel like they have no other avenues left available to them. It’s all about changing the narrative surrounding debt and bankruptcy and mitigating the fallout both socially and financially.
In the UK, since April 2016, there has been a recent move towards moving bankruptcy applications online, circumventing the need for debtors to make that long slow march into court. Liz Thomas, The Adjudicator at the Insolvency Service for England and Wales said of the new online form: “We now have a simpler form and people are able to complete it in their own time and after pressing the submit button, some 95% of successful applicants are declared bankrupt within two working days.”
It’s the public admission of troubles which causes the greatest upset, particularly in Southeast Asian countries, so this concept of digitising debt and taking the pain and bother out of bankruptcy proceedings could and should comfortably be transplanted to banks in the East.
For collectors, this means not only investing in self-service options but AI chatbots, which allow debtors to deal with their accounts without having to speak to another human being. Granted, the infrastructure might not be available in all countries to support all avenues, but there are certainly options to consider.
With so many disparate cultures and situations at play in the region, Southeast Asian banks need to be flexible with their debt management solutions. However, if debt collections is made simpler, more customer-centric and more anonymous, the cultural shame need not be a challenge in any locality, regardless of the intricacies and the history behind it.
For more insight on how regional and local culture affects debt collections practices around the world, download our latest ebook on “The Cultural Considerations of Collections.”