10 Common Factors That Affect Debt Collection Process in Southeast Asian Countries

Southeast Asia is a varied and culturally rich region of countries, all of which have different levels of economic development and present different challenges for the banking industry. Additionally, the area has a tonne of economic potential: With average expected economic growth rates of 5.1% for member states of the Association of Southeast Asian Nations (ASEAN), Southeast Asia is one of the world's fastest developing regions.

There are still significant obstacles for banks functioning in these nations, whether they are local banks already there or international organisations joining the market. These obstacles are especially present when it comes to debt recovery and collections. Ten similar tasks are listed below;

As an insurance company evaluated local payment patterns, court cases, and insolvency, it was discovered that the region had the highest number of countries categorised as "severely" difficult. By outlawing dishonest collection methods and granting debtors more protection and rights, policies like the Debt Collections Act and the Debt Clinic established by the Bank of Thailand are assisting in the regulation of how creditors collect debt. But there is still a lack of awareness and enforcement of the statute.

1. Dishonesty

The issue of corruption, which banks continue to face, is another evident similarity in the area. Not only do rising economies face this issue, but more than 40% of businesses in the area are expected to offer "gifts" in exchange for government contracts. In the meantime, at the local level, the 1MDB crisis in Malaysia has rocked the financial community recently, with a parliamentary committee discovering at least $4.2 billion in irregularities pertaining to the business. The issue also involves Singapore, where DBS, a major bank, has been linked to 1MDB's misdeeds through a number of transactions. In contrast, Cambodia's score on the Transparency International Corruption Perceptions Index (CPI) was 20, which puts it just 6 points higher than North Korea's infamously corrupt score. Vietnam scored 33, and while it is making steps to combat against corruption, there is still a mountain left to climb. Additionally, corruption is rampant in Laos, where 99 government targets or agencies get loans or financial aid from overseas sources, costing the government as much as $30 million.

Although each is addressing corruption in a different way, debt collection is currently directly impacted by the issue. Corruption encourages the tax code to be overly complicated and subject to numerous arbitrary exclusions. Institutions that collect taxes are also made less effective and efficient by corruption. It is much harder to recover past-due loans when a nation's governmental, financial, and economic institutions are built on such flimsy foundations. This indicates that it is imperative to have a strong pre-collections plan and to take all reasonable steps to keep debtors from going into default on their debts.

2. Inadequate Rules

Spiralling debt and a number of incredibly lax banking rules have plagued Southeast Asia. In 2012, Vietnam experienced a severe debt crisis, and many other countries in the area would experience one soon. Lax financial regulations and laws are another issue that many nations in the region face. From the standpoint of debt collection, these factors typically result in a high proportion of non-performing loans (NPLs). Banks exposed to regulatory arbitrage—the use of regulatory gaps to evade costs—and crises are the result of lax rules.

Things are, nevertheless, gradually improving: the Vietnamese government established new goals for regulating NPL rates and capital adequacy standards. It is now a challenge to move past the past and fulfil these new demands. Banks in the area are calling for a regulatory recalibration. When it comes to regulatory compliance, banks have a chance to modernise and combine the objectives of regulatory compliance with business strategy, from cost-effectiveness and risk management to operational simplicity and growth ambitions.

3. Establishments

A high degree of contact between local collectors, banks, and clients is necessary for successful debt collection. Issues will surface if the infrastructure necessary to facilitate that communication isn't in place. Modern debt collection infrastructure requires digital transformation investments, and many of the region's nations may not be prepared to handle the pressures that come with such a shift. But positive things are happening; a lot of companies are moving their data centres to the area, and data centres are starting to play a bigger role in banking operations.

Conversely, Southeast Asian cities are experiencing tremendous economic expansion, with Vietnam, Thailand, and Cambodia all showing signs of substantial long-term growth. In fact, a recent assessment from PwC called the capital flow in the region a "embarrassment of riches." But when economies expand quickly, people are flooding into cities in search of better jobs and a better life, and many of these places are ill-equipped to handle this enormous inflow. Unplanned urbanisation that happens quickly brings additional difficulties as living expenses and rents rise. Customers of banks may find it difficult to pay their debts in this environment and will require assistance from their banks in order to stay ahead.

4. Inadequate Technology

Even though usage has generally increased and several countries in the region are among the hottest spots for fintech growth, some still lag behind in terms of technology. For instance, the issue of cultural acceptance exists in Indonesia, where many people still regard internet purchases with suspicion. Because of this, there is a low credit card penetration rate and a surprisingly poor uptake of online payments, which makes debt settlement more difficult for banks that would rather simplify and streamline their operations.

However, because of its delayed acceptance, Indonesia—which has a young population of over 261 million people—is positioned as a "large and untapped" market, according to Muhammad Fajrin Rasyid, co-founder and president of the Indonesian e-commerce company Bukalapak. "Only about 10% of Indonesia's population has shopped online," he says. This is mostly because they don't understand how internet payments operate or they don't trust them. So, the major obstacle for banks looking to invest in digital transformation in the area is raising awareness and making use of user-friendly software.

5. Monitoring Debtors

These days, we may move money from our own devices to another in a matter of seconds thanks to mobile banking apps. However, in many Asian countries—many of which still rely on physical forms of identification—identification technology that we may take for granted in the west is still lagging behind. This reliance poses a challenge for collections teams because paperless technology is more cost-effective and environmentally friendly, while also being more convenient for both the banks and the debtors.

Without the advantages of digital transformation, it is more difficult to find debtors and the user experience is negatively impacted. Additionally, there are other Southeast Asian nations where it is typical for citizens to lack an official form of identification. This adds to the difficulty of skip tracing—finding a debtor who has changed addresses. All the same, progress is being made. When ID cards with fingerprint and photo biometric data were introduced in 2001, Malaysia was the world's first country to do so. Since the Digital ID Bill was passed in 2018, ID cards have also been the norm in Thailand and Indonesia since 2011.

6. Inadequate Strategy for Collections

Collections techniques in the region still fall considerably behind their Western equivalents, with banks lending irresponsibly and without having a long-term view on debt. In the case of Cambodia, for instance, only 4% of people have formal savings, but 28% have official bank loans. Those numbers just don't add up. Because of this, small loans are a big issue in Cambodia, where the average loan amount is among the highest in the world. The National Bank of Cambodia reports that a record $2.8 billion is owed by 2 million borrowers.

According to Ou Virak, director of Future Forum, a think tank based in Phnom Penh, 10% of borrowers in the nation are just unable to make their loan payments. "While salaries have increased over the last ten years, an economic downturn could result in an unsustainable environment while people are losing their jobs," he clarifies. In such a setting, banks must begin to be more discriminating about the loans they make and decide whether to approve or reject loan applications based on the data at their disposal. They must also realise that collections have an entire lifecycle and don't just start at default. Not only should more money be put into pre-collections, but also into keeping accounts from becoming delinquent.

7. Information

The region is leading the way in terms of the growth of unique internet, mobile, and social media users, according to a 2019 WeAreSocial research, indicating that internet and smartphone penetration is rising in the area. Southeast Asia is the top region for the increase of mobile data traffic, with data use rising by 29% in 2018. This is due to the region's expanding digital penetration and more affordable mobile data. The Southeast Asian data centre development industry is expected to reach $2 billion by 2024, making this an ideal time for banks to make an investment.

Even if the region has access to more data than ever before, handling such a volume of data can present certain difficulties, especially in areas that are not well-suited to handle it. Data centres are expensive to operate and difficult to construct in Southeast Asia. They are also susceptible to power outages, system malfunctions, and cyberattacks—problems that afflict a lot of growing economies. Because of this, banks considering investment in the space must invest in reliable digital infrastructure and adjust their debt collection procedures appropriately.

8. Culture 

The cultural translation of their services and debt recovery procedures is a special barrier for Western banks hoping to expand in Southeast Asia. Nor are we limited to language translation alone. There are several particular cultural sensitivities to consider, ranging from the religious to the negative connotations associated with debt collecting because of the region's history of agencies using third-party force. The ability of banks to adapt their technology to the cultural requirements of their local clients is essential.

It is also believed that cultural disparities may act as a roadblock to the region's digital transition. Customers should be aware that identities are no longer based on paper records, especially when it comes to debt collection procedures. A number of reliable, regulated digital identity services are now available, and they are flexible enough to accommodate customers' cultural needs and integrate with local collection tactics.

 9. The State of the Economy

Without a question, the economies of the region are expanding, with real GDP growth observed in the majority of the countries. But expansion also brings with it a challenge. Southeast Asian nations still have obstacles to overcome in their efforts to recover debt. These challenges include: maximising the benefits and minimising the hazards associated with financial technology; and bolstering export performance in the face of growing protectionism.

• Reducing the possibility of natural catastrophes.
• Tracking developments and tensions in geopolitics, as well as the speed at which advanced economies implement monetary policy.
• Improving financial literacy to optimise the utilisation of financial technology products and manage risk within the household.
• Reducing trade protectionism's negative effects by advancing structural reforms further.

Though there are obviously obstacles in the way of banks hoping to establish a foothold in Southeast Asia, the region offers such tremendous economic potential that the effort is well worth it. While it may seem that there are a few large obstacles to overcome among the issues listed above, most of them are manageable with the correct resources and strategy.

In the end, the topic of debt collection will always have varying effects on various nations depending on their respective political, economic, and cultural environments. Every institution, no matter how big or where they are from, should truly take this to heart. At the core of it all, though, is the desire to make the procedure as easy and pleasant as possible.