Whilst APAC presents a potentially lucrative market for businesses and investors, when it comes to debt collection, unfamiliarity with local legal systems and taxation – not to mention some antiquated collection practices – has lead to some serious challenges. As a result, debt collection in the region has become notoriously tough.
Indeed, in a recent Euler Hermes report that assessed local payment practices, local court proceedings and local insolvency proceedings, the region was found to have the largest number of countries with a 'severe' debt collection complexity rating.
So, why is the region lagging so far behind? And what can be done on a local level to help assuage the more widespread difficulties? Let's start by examining some of the countries involved.
The Local Issues
In Thailand, debt levels are rising and locals are struggling to keep up. The country held a personal debt mountain equivalent to 77.6% of GDP in March 2018, with Thai households finding it increasingly hard to meet payments. And things are undoubtedly going to get worse, as the central bank has already signalled its intent to raise interest rates. In Malaysia, too, whilst there have been developments of late in the law governing corporate insolvency, introduced by the new Malaysian Companies Act of 2016, personal debt still ranks as one of the highest in the region, at 88.4% of GDP as of the end of 2016.
In both cases, this is due in no small part to notoriously convoluted local court and insolvency proceedings. In Thailand, for example, for smaller loans (2,000 baht or less, which is about $60 USD), the only evidence required to determine whether or not a contract of loan for money can be enforced in court is a witness testimony that a contract was made. This results in court proceedings being common even in the case of very small claims. There is also an ingrained culture of debtors simply not paying back personal loans or refusing to settle in court. Further complications.
Whilst there are problems in Thailand and Malaysia, however, in Vietnam, which is seen as one of the fastest growing emerging markets in the region, the problems are far more deeply rooted. As of mid-2017, public debt in Vietnam was at around $94.6 billion USD – or about $1,038 USD per capita – and has steadily increased over the last two decades from 36% of GDP in 2001 to about 62.4% in 2016.
This is primarily due to the burden of cost placed on the country by the Communist Party of Vietnam (CPV). With four million members, the government is an exceptionally heavy burden on the national budget, since it must fully finance its own staff, offices and activities. This has led to a catastrophic national debt – $13.1 billion USD, or 6.5% of GDP, in 2016 – which the government is supposedly attempting to reduce to 3.5% of GDP by 2020.
Effectively, whilst there is consistent economic growth in Vietnam, this growth can't keep up with such a heavily-staffed government, with recurrent governmental costs accounting for 66.3% of total government expenditure in 2016. How does this relate to debt collection? A rise in taxes and a rise in public debt service obligations, not to mention a rising government budget deficit, will always raise public debt as households and businesses alike struggle to balance their personal and public expenses and commitments.
Dinh Tien Dung, Minister of Finance, pointed out that “Public debt is increasing rapidly, primarily because of weaknesses in managing and using loans.” The primary problem with debt in Vietnam, however, is still the links between the debt collection industry and organised crime, as the country is still rife with violent debt enforcement.
Dau Anh Tuan, head of the Vietnam Chamber of Commerce and Industry (VCCI)’s Legislation Department, said in a recent interview that many enterprises collect as much as 90% of their debts using the services of gangsters, compared to only 50% with legal enforcement. A survey commissioned by the VCCI found that of the three options enterprises have available to them – legal proceedings, legal debt collection services and hiring gangsters – going down the illegal route is always the most effective option.
This is because it takes an average of 400 days to follow through on legal proceedings, at a cost equivalent to 20% to 30% of the debt and about a 50% success rate. However, using gangsters, enterprises can often collect as much as 90% of their debts in one month at a cost of between 40% and 70% of the debt. With such damning statistics on the table, is it any wonder that the debt collection landscape in the country is in complete disarray?
There are slivers of hope to be found in some APAC countries, however. In Singapore, for example, the court system is fairly efficient, which is reflected in the Euler Hermes report, with Singapore comfortably avoiding the 'severe' categorisation. This can largely be attributed to a number of local reforms, which have been, according to law firm Clifford Chance, “aimed squarely at cementing [Singapore’s] place as an international restructuring hub in Asia with the adoption of a more debtor-friendly regime than in other jurisdictions in the region.”
However, legal expenses in the country are still notoriously high, with complex cases costing as much as $40,000. The Euler Hermes report also highlights how Singaporean law provides no guidelines regarding late payments, with contracts the only reference point when business relationships turn. The report adds: “The insolvency framework is in line with international standards. However, in practice, as in most countries, collecting debt from insolvent debtors would prove to be a genuine challenge.”
The Regional Issues
Local issues will always lead to a snowball effect for the entire region. The primary problem that appears to be uniform amongst most of the APAC countries referenced above is the protracted legal and court proceedings that inevitably follow insolvency. As such, surely it makes sense for firms to put more effort into solving these problems before they get to the courts? Many businesses and banks are doing just that by outsourcing their collections work to debt collection agencies who understand local intricacies.
In a recent interview with Xinhua, Tony Au, APAC senior regional manager for the Amsterdam-headquartered collections company Atradius Collections, said debt collection in the region is “more challenging and tends to take longer to resolve” than in other regions. He attributed this to several factors, including “the business culture, language barrier, and issues regarding jurisdiction.” Putting a particular spotlight on Southeast Asia, Au added that legal proceedings in the area “usually take many years and need multiple hearings before a final judgement is handed down.” He also mentions that, more often than not, “solicitors' fees are not cheap and upfront payment is expected.”
Raymond van der Loos, managing director at trade credit insurance company Atradius, agrees that outsourcing makes sense to most companies based in the region, because it “makes the process smoother for all parties concerned.” This is primarily because agencies that specialise in debt collection know which strings to pull and which buttons to press to convince debtors to pay up, circumventing the notoriously costly and lengthy legal battles.
The problem with local payments and local court proceedings is that they are reactive to people getting into debt. These local debts lead to greater complications, which ends up leading to even greater debt. It's a vicious cycle that can only be broken via a more thorough understanding of local laws and taxes and an implementation of better collections strategies; strategies that pre-empt NPLs, rather than react to them.
Of course, a greater push towards digitisation and digital transformation will help substantially, and this will undoubtedly become even more important within the next few years; particularly as smartphone adoption continues to increase in the region, with smartphone penetration hitting a high of 34.9% in the region in 2018. Instant payment is also taking off in a number of APAC countries, with India, Malaysia, Hong Kong and many others implementing electronic payment options, which offers a far more flexible and less stressful option for debtor payments.
Local banks should also be looking at pushing for a more customer-centric approach to debt collection in order to catalyse a more approachable and less stressful debt collection environment. Again, digitisation is a major aspect of this, but on a larger scale, the 'problem' of debt collection needs to be reframed in a more positive light. The narrative needs to change, and it's only going to change if everyone is singing from the same hymn sheet.
If banks, businesses and debt collection agencies can work together to sort these issues out on a local level and develop more stable, customer-centric and lawful systems and debt collection practices, debt collection pressure in the region as a whole should – eventually – settle down.