Development of Non-Bank Consumer Financial Business in Thailand and
Policy Recommendation: The Case Study of Personal Loan Companies
Chodechai Suwanaporn
Fiscal Policy Office, Ministry of Finance
Part I Non-Bank Financial Institutions
Non-Bank Financial Institutions (NBFIs) or non-bank businesses are
internationally recognised as financial institutions or intermediaries that
provide several forms of financial services within the economic system,
and which require specialised expertise in those areas. On the whole,
NBFIs provide financial services that differ from those provided by banks,
and create a variety of financial services as well as increase competition
between different financial institutions. As a result, customers and
consumers receive more effective services.
Generally, non-bank
businesses refer to non-deposit taking financial intermediaries. However,
some countries define non-bank businesses as non-deposit taking
financial intermediaries only for current accounts; in other countries, nonbank businesses include differing characteristics, including taking deposits
but not providing credit services, such as postal saving entities in the
USA, Japan, and Italy.
Thailand has long been a bank-based economy. Most business
sectors and people obtain funds and support from commercial banks,
which function as financial intermediaries and provide loans in response
to the demand of working capital. The total overall business value of all
financial institutions, calculated from the amount of credit at the end of
2005, was 7.50 trillion Baht. Of this, banks accounted for 6.89 trillion Baht
(91.86%), financial companies or securities firms for 0.16 trillion Baht
2
(2.16%), life insurance companies for 0.05 trillion Baht (0.67%), credit
foncier companies for 0.95 billion Baht (0.01%), and other general nonbank companies for 0.40 trillion Baht (5.29%). However, when combining
traditionally so-called “non-bank businesses” operated by financial
companies as well as banks, the total credit of these non-bank businesses
was 714.19 billion Baht, equating to 9.5% of the total value of the whole
credits in the financial system. This indicates that non-bank businesses
have a rather limited role as a source of funds in supporting the economic
development of the country when compared to commercial banks but still
have a lot of room to grow. Therefore, Non-bank businesses should be
given greater support and encouraged to play a bigger role as sources of
funds for the economy.
In the last decade, NBFIs have expanded their role as sources of
funds for business sectors and everyday people.
At the end of first
quarter of 2006, Outstanding personal loans serviced by non-banks and
banks were 130.63 billion Baht consisting of 75.35 billion Baht from nonbanks, 55.14 billion Baht from banks and 0.14 billion Baht from finance
companies. Outstanding credit card loans serviced by non-banks and
banks were 143.56 billion Baht consisting of 67.05 billion Baht from nonbanks, 48.56 billion Baht from Thai banks and 27.95 billion Baht from
foreign banks. Factoring companies, which provide working capital loans,
had outstanding loans of 80 billion Baht. Leasing companies had leasing
loans of 60 billion Baht.
Finally, hire-purchase companies had hire-
purchase loans of 250 billion Baht.
Personal loan, credit card, and
factoring companies are short-term sources of funds; whereas, leasing
and hire-purchase companies are medium-term (3-5 years).
NBFIs still have a small role compared to commercial banks in the
financial system. This is partly due to unclear supervision, related laws,
and the implementation of rules and regulations. In other words, the level
3
of regulation varies between different types of enterprise or is sometimes
completely lacking, meaning that each operates under different regulatory
standards. This may also bring unfair advantages or disadvantages to
entrepreneurs with the same type of business. Moreover, with no specific
laws relating to non-bank businesses, financial institutions must depend
on other related laws. Conflicts within these laws, such as conditions for
terminating a hire-purchase contract as stated in the Civil and Commercial
Code, differ from those stated in the Laws of Consumer Protection Board.
In Thailand, these problems particularly affect developing non-bank
businesses.
Moreover, data regarding NBFIs is randomly distributed
amongst several organisations such as the Non-bank Entrepreneur
Association, the Ministry of Commerce, the Bank of Thailand, and several
other research centres; there is no systematic/central database.
This
hampers the public sector when trying to plan suitable and effective
developmental and regulatory policies.
This study of the development and regulation of NBFIs gathers and
analyses details, facts, and statistical data in order to provide guidelines
for uniform development and administration.
For this investigation, I
chose to analyze personal loan companies since developmental
guidelines and supervisory systems are still unclear and more importantly,
these companies are growing very quickly, and have high value and high
potential as useful sources of funding within the economic system. They
also have an important role to play in the determination of policy with
regard to controlling the distribution of credit appropriately and the impacts
on the economy.
If non-bank businesses can be developed and regulated appropriately,
they will provide an important source of funds to compliment the
commercial bank system; this alternative source of funds will mean the
economy does not have to rely entirely upon commercial banks.
4
Moreover, appropriate policy will bring stability to financial institutions as
well as support and facilitate the growth of Thailand’s economy.
Part II The case study of personal loan companies
Summary of findings and recommendation
The rapid expansion of the system of personal loan businesses,
especially non-bank providers, has caused the financial regulators to worry
about the financial stability of the country, and call for suggested regulatory
guidelines for this type of business. The guidelines for control are similar
to those of the credit card business as proposed by the Bank of Thailand.
For this reason, I have studied and researched the aforementioned
business by gathering data from different organisations such as the Bank
of Thailand and the National Statistical Office.
Interviews with
entrepreneurs to elicit known problems and general information about their
operations were also conducted. Data was also gathered from foreign
personal loan entrepreneurs, foreign research, and by consultation with the
Office of Consumer Protection Commission. This has led to perceive facts,
problems and obstacles for use as guidelines in proposing systematic and
appropriate regulations that meet the actual needs and operations of the
business. This will be to the advantage of consumers, entrepreneurs, and
the national economic system. The results of the study on personal loan
companies can be summarised as follows.
The personal loan business is divided into 2 types; unsecured loans
and secured loans. The type of personal loan investigated was unsecured,
providers of which fell into 3 categories; commercial banks, non-bank
financial institutions (NBFIs), and specific financial institutions (SFIs). Data
from the Bank of Thailand indicates that outstanding unsecured loans
account for approximately 376,000 million Baht or about 3% of GDP. The
5
number of clients is about 3.86 million. However, at present there are no
rules or clear regulations for this type of business.
1. Household debt is lower than other countries
When considering household debt in Thailand compared to other
countries such as Japan, South Korea, Singapore, Malaysia, USA, and
Australia and by using household debt against household income as a
percentage (Fig. 1) and household debt against GDP as a percentage (Fig.
2), it is found that Thailand comes out quite low, which is consistent with
reports from the World Bank. The Bank of Thailand also reported that
Thailand’s household debt in the 2nd quarter of 2004 was, on average,
103,940 Baht/household, up from 21,000 Baht in 2002. The proportion of
household debt to income was 59%, up from 51% in 2002.
It was
concluded that Thailand’s household debt was at a low level and not of
concern.
Figure 1 Household Debt against Household Income
% of Household Debt against
รอยละหนี
ตอรายไดภาคครัวเรือน
้
Household
Income
160.00
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
Year
ป
1998
1999
2000
2001
2002
2003
2004
Japan ญีปุ่ น
South
Korea
 Australia
ออสเตรเรีย USA
สหรัฐอเมริกา
เกาหลี
ใต ไทย Thailand
6
Figure 2 Household Debt against GDP
Ratio of Household Debt to GDP (%) (For
สัดสวนหนี
ภาคครั
้
วเรือนตอ GDP%(รายประเทศ)
Each
Country)
Singapore
85
USA
84
Australia
84
UK
77
63
Malaysia
S.Korea
62
Hongkok
60
Thai
33
Indonesia
10
india
6
0
10
20
30
40
50
60
70
80
of ภาคครัวเรื
Household
Debt
to%GDP (%)
สัRatio
ดสวนหนี
้
อนต
อGDP
2. Income structure of personal loan users
Data collated for the 3rd quarter of 2004 by the National Statistical
Office of Thailand showed that, countrywide, approximately 35 million
people were employed*, of which about 15.64 million or 44.68% had
permanent incomes. Of those who were employed and had permanent
incomes, about 14 million persons had incomes of less than 15,000 Baht
per month (Fig. 3).
According to information supplied by the Bank of
Thailand on the number of personal loan users within the entire system,
there were a total of about 3.85 million unsecured loan users† or 13% of all
employed persons in Thailand. Of these personal loan users, 2.4 million
*
Summary of Condition of Employed Population in September 2004, National Statistical Office
90
7
had incomes of less than 15,000 Baht per month equating to 62% of all
unsecured loan users (Fig. 4) or 16% of all those in Thailand with
permanent incomes.
Figure 3 Income Structure of Permanent Income Population in
Thailand
Approx. 15.64
million persons in
total
15,000 - 30,000
Baht/month
More than 30,000
Baht/month
7,000 – 15,000
Baht/month
Less than 7,500
Baht/month
11.172
นคน
11
.712ลาMillion
†
านคน
22.34
.34ลMillion
Survey of 13 commercial banks and 9 NBFIs, Bank of Thailand
านคน
11.21
.21ลMillion
นคน
00.25
.25ลาMillion
8
Figure 4 Income Structures of Personal Loan Users - Commercial
Banks and NBFIs
Approx. 3.85
million persons in
total
More than 25,000
Baht/month
17%
Less than 7,000
Baht/month
23%
15,000 - 25,000
Baht/month
19%
19%
10,000 - 15,000
Baht/month
22%
7,000 – 10,000
Baht/month
However, when considering the overall picture of personal loan
services within the entire system, it was found that the target customers of
NBFI personal loan providers were customers who had incomes of less
than 15,000 Baht/month.
This was consistent with survey data that
indicated that of the 1.82 million NBFI personal loan users, there were up
to 1.26 million users who had incomes of less than 15,000 Baht/month or
about 70% of all NBFI personal loan users.
By looking at the income structures presented above, it is clear that
the majority of personal loan users are those with low incomes, and that
most use services provided by NBFIs. Therefore, controlling the minimum
income of borrowers or fixing the interest rate ceiling may cause
entrepreneurs, especially NBFIs, to cancel providing loans to low
incomers. This will seriously affect low incomers and force them to turn to
black-market services. According to a report by the Bank of Thailand
(BOT), after developing their personal loan business, the number of black-
9
market loans decreased. At present 36% of low incomers are debtors of
black-market providers.
3. Effects Which may Occur if Setting Restrictive Measures
on Personal Loan Companies
3.1 Controlling Interest Rates (Fixing Interest Rate
Ceiling)
Setting the interest rate ceiling may cause Non-bank loan
providers to change their target group from low incomers to high incomers.
There are 2 main reasons. Firstly, to operate this kind of business, there is
an important cost used to calculate interest, the operation cost, most of
which is fixed. Therefore, when taking into account the operation cost, a
small releasing loan is more expensive to the institution than a large-sized
loan. Compared to high incomers, most of the services provided to low
incomers are of smaller loans due to limited income.
Secondly, low
incomers have a high default rate. Information indicates that the number
of non-performing loans (NPLs) owed by clients with personal loans and
incomes lower than 15,000 Baht/month totalled 143,000 cases or 74% of
the total NPL. From all these reasons, the cost of providing loans to lowincome users is higher than to high incomers – this means that providers
have to reduce the burden of default risk costs by refusing to release loans
to low incomers. If the interest rate ceiling is determined by the regulatory
sector without appropriate cost reflection, it will force low-income users to
use black-market services (Fig. 6). These assumptions are consistent with
studies conducted in many countries including the UK and Japan. It also
creates intense competition within the business due to the change in target
group of NBFI personal loan providers from low incomers to high incomers,
presently being serviced by commercial banks. As a result this consumer
group will have an excessive debt burden due to the over-expansion of
credit limit to them. This will increase the amount of household debt as
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well as the proportion of NPL from personal loans. Meanwhile, low-income
customers will be forced by market forces to utilise black-market loans,
which brings negative impacts to society and the national economy. Many
social problems will arise, as has occurred in Japan where the number of
criminal cases involving black market debt ‘recovery’ have increased since
the government passed laws controlling the interest rate ceiling. Some
consumers may turn to the services of Specialized Financial Institutions
(SFIs) instead. However, SFIs may not be able to provide comprehensive
services to low incomers since they already deal extensively with large
numbers
of
low-income
and
non-permanent-income
customers.
Therefore, precise countermeasures to help low-income users should be
prepared before determining or controlling the interest rate ceiling.
However, information acquired from interviews with entrepreneurs
and from Kasikorn Research Centre shows that the cost structures used to
determine the interest rates of bank and non-bank personal loan providers
(Table 1) were highly variable, implying that the data should be considered
carefully. This can be seen in the disparity of operation costs, where the
difference between the highest and lowest operation costs provided by
banks was 17%; for NBFIs the difference was 15%. Therefore, if the BOT
used average cost structures when determining the interest rate ceiling,
mistakes could be incorporated.
If it is necessary to determine an interest rate ceiling, it is suggested
that the regulatory sector should conduct further studies in order to more
accurately gauge determining factors before assigning appropriate levels.
In the USA and Italy, for example, the interest rate ceiling is determined
according to the size of the total loan. In other words it is not determined
from the averaged predicted costs provided by all providers.
The
determination of interest rate ceiling should be calculated in order to allow
every provider to operate its business capably and to provide a service to
every type of borrower. This will be consistent with government policy that
encourages people to make greater use of legitimate loans. This should
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start with a detailed study of the structure of costs and funding of loans by
entrepreneurs. It is probably best to invite entrepreneurs to consult on the
appropriateness of any proposed interest rate ceiling.
Table 1 Structure for Determining Interest Rate of Personal Loans
Structure for Determining Interest Rate of Personal Loans
Bank
Structure of interest rate
(%)
Non-Bank
AVG
Max
Min
AVG
Max
Min
Cost of fund
2.5
3.8
1.7
3
4.0
2.5
Operation Cost
13.2
19.1
2
11.8
19.0
3.6
Default rate
5.9
9
3.2
9.1
19.5
3
Margin
1.4
12.5
-9.2
1.5
6.6
-7.5
Remark: Average personal loan interest rate is 28.37% for (9) commercial banks and
31.06 % for NBFIs (Source: Kasikorn Research Centre)
Figure 5 Effect of Determining Interest Rate Ceiling on Consumers
Number of
customers
Low Risk
Consumers
High Risk
Consumers
Number of
customers
Ceiling Rate
P
%
12
Fig. 5 shows the distribution of population as classified by income,
and indicates the effect of determining an interest rate ceiling on
consumers at each level of income.
It hypothesises that low-income
customers will have a higher default risk than high-income customers due
to the determination of interest rate as calculated from burrowers.
Providers determine the risk based pricing of each customer in order to
cover any costs they may incur from the risk. In Figure 5, high default-risk
low-income customers are on the right whereas low default-risk highincome customers are on the left. The area below the graph shows the
number of consumers. If determining the interest rate at P, it will mean
that providers are able to provide loans to low risk consumers, i.e. those
consumers to the left of P, and unable to provide loans to high risk
consumers, i.e. those consumers to the right of P. Alternatively, loans
could be provided to high risk consumers under special conditions such as
loan sureties or co-burrowers. Therefore, if the public sector determines
the interest rate ceiling, providers will avoid granting loans to high risk
consumers or will stipulate rules to reduce risk, thereby decreasing the
chance of a loan.
Therefore, the determination of an interest rate ceiling will have two
negative effects on low incomers; 1. It will reduce the opportunity of
applying for and being granted a loan; 2. Customers will find other sources
of loans to meet their requirements such as the black-market.
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Figure 6 Distribution of Income Levels of Legitimate Personal Loan
Users
900,000
800,000
700,000
Persons
600,000
500,000
400,000
300,000
200,000
100,000
Over
25,000
20,00125,000
15,00120,000
10,00115,000
7,00110,000
4,0017,000
Below
4,000
Income Levels
No. of Population
Fig. 6 shows the distribution of personal loan users within the overall
market and shows a normal distribution similar to that of NPLs arising from
personal loans and classified by income level. It is consistent with the
aforementioned hypothesis that providers have a tendency to avoid
providing loans to low-incomers (which are on the right of the figure 6)
since, from the viewpoint of providers, low incomers have a higher defaultrisk than high incomers. Therefore, as previously seen, low incomers will
be most affected by the changes.
However, the remaining customers with a low enough risk for
providers to provide them with a loan may be affected by changing
strategies employed by providers to increase the potential income
available from them. This may include strategies such as increasing the
size of the loan available for each account by providing higher credit limits
than consumer demand or extending due dates for payments. This will
14
cause excessive loans within just one group of consumers and an overly
long instalment basis.
Determination of an interest rate ceiling will inhibit an important
aspect of loan business operations, namely risk based pricing, which will
bring with it an unfair calculation of interest rate, meaning that those who
have good credit and good financial discipline will be charged interest at
the same rate as those who have bad credit or poor financial discipline,
due to a blanket rate of interest for every account. Moreover, there will be
an excessive effort to increase credit limit, which will benefit only one
group of consumers, those with the power to spend money excessively.
As a result, the determination of an interest rate ceiling may solve
one problem, but it will also create many others. Studies on the effects of
interest rate ceilings in the USA, UK, and Japan have shown many
induced problems including social and criminal injustice.
The correct
balance should be reached by allowing responsible and complete
competition within the business. This will bring efficiency of service as well
as cause the interest rate to decrease naturally due to competition. A
similar situation can be seen in the leasing business in which interest rates
were initially very high but have now decreased to a very low level due to
competition. It also protects consumers and increases the opportunities
for new providers to enter the market.
Not least, it increases the
opportunity for low incomers to access a source of low cost funds.
15
Figure 7 The Relationship between Credit Card Loans, Personal
Loans, and Black Market Loans Under Regulatory Control
Credit Card Loans
Personal Loans
Black Market Loans
Employed persons with an income of less than
5,000 Baht/month are approx. 20 million. (This is
62% of 33.5 million employed persons in
Thailand in 2004)
3.2 Setting Maximum Credit Limit at Not Over 5 Times
Income Level
The determination of maximum credit limit per person per
provider does not decrease household debt because practically all
consumers, especially whose who have financial problems, seek for
liquidity by asking for loans from more than one provider. Therefore this
method needs more detailed and better control; the determination of
maximum credit limit should be borrower-based rather than institutionbased.
For example, a user may be granted loans not exceeding a
multiplier of their income (sometimes may be more than 5 times) for all
loan providers together. This is not a maximum credit limit of up to 5 times
the level of income from each provider, since this could still lead to
borrowing from several providers at the same time. Therefore, the central
credit bureau should, by law, be required to hold data and inform members
or providers of the current loans held by each burrower prior to any new
16
application for credit approval.
This information should be updated
continuously so that providers have access to real-time data.
3.3 Setting Required Capital
The decision to allow private individuals to register and operate a
personal loan business is one way to help increase and legalise
opportunities for those currently in the black market who might want to
enter the legitimate market. However, to operate this kind of business
involves risk management by which credit (of a fairly substantial amount) is
distributed to several groups of users.
This will greatly affect small
entrepreneurs, so much so that they may not be able to operate due to
limitations on interest. It could easily lead to private businesses avoiding
registration.
3.4 Regulatory Scope
Since bank and non-bank entrepreneurs provide services to
different groups of customers, i.e. bank providers deal with high-income
customers whereas non-bank providers deal with low-income or high risk
customers, regulatory guidelines may have to vary according to situation.
Using the same rules and regulations for all may bring about more bad
results than good.
4. Effects of Lack of Regulation during Non-bank Insolvency
Below are three reasons why the insolvency of non-bank business
providers has little effect on the economic system and general population
during periods when they are unable to operate.
1) Non-bank providers have relatively low bank loans so when
financial problems occur the knock-on effects on the financial system are
small.
However, if these non-bank providers were to come under the
control of the Securities and Exchange Commission, Thailand (SEC), they
would need reserve capital that meets the strict regulations of the SEC.
17
2) For some of the loans which are debentures or other
derivatives, such as securitisation, non-bank providers under the
supervision of SEC cannot sell directly but must sell through institutional
investors. Therefore, there is no direct impact on the people.
3) Other sources of capital.
Since many personal loan
companies use capital from foreign parent companies, insolvency will not
affect the financial system of the host country.
However, if considering the differences in rules and regulations for
business operation, non-bank companies listed under the Stock Exchange
of Thailand have to establish capital reserve in accordance with the
regulations stipulated by the SET, which are much stricter than those of
the Bank of Thailand. For example, debt without payment of interest over
3 months shall lead to 100% provision (cease revenue receipts, loss
recognition), debt with no performance over 6 months shall be adjusted to
bad debt, general provision shall follow the historical default rate (general
banks determine the fixed rate at 1%), and loan collateral securities shall
not be calculated for the reserve. These limitations make banks superior
in terms of capital of operation cost; they are also entitled to receive
deposits.
5. Suggestions for Regulation and Development
5.1 Development of Credit Bureau
▪ Increase data, such as payment of water bills, electricity bills,
telephone bills, and basic public utilities, to help estimate risk.
▪ Adjust credit bureau charges appropriately in order not to
burden members. Promote the usage of data held by the credit bureau.
▪ Develop real-time data access for members that the credit
bureau will update continuously.
▪ Amend current laws and stipulate that all loan providers must
be members of the credit bureau. This will mitigate the effect of large
18
providers not wanting to share data.
In this respect, there should be
precise guidelines to create equity to all providers.
▪ The credit bureau should issue central credit scoring for all
customers to be used as a benchmark for personal loan business
members. Since the credit bureau holds the largest source of data, their
benchmarks will be the most precise and reliable; this will be an incentive
to join the credit bureau.
5.2 Development of Credit Scoring
When the credit bureau has been developed, credit scoring will
be better managed since increased data will help precisely estimate the
risk of each consumer and reduce the cost to business providers; due to
free competition, this will be reflected in decreased interest rates for
consumers. It will also help support the issue of central benchmarked
credit scoring for members when considering the risk of each customer,
decreasing operational costs.
5.3 Determination of Interest Rate Ceiling
If the interest rate ceiling has to be stipulated, a detailed study of
how to determine an appropriate level should first be conducted. In order
to prevent the negative impacts on low incomers brought about by
providers refusing to give credit, the average cost to providers should not
be used to calculate the ceiling.
Different interest ceilings should be
determined that reflect the true risk of burrowers - data from the credit
bureau such as default performance, total received loans, default rate, and
number of financial institutions used by the debtor should be taken into
account. As in the USA, the interest rate ceiling can also be determined
according to the size of loan in each account.
5.4 Promotion of Free Competition under Transparency of Data to
Consumers.
In order for consumers to make clear cut decisions when
choosing a service, laws should be passed that force business providers to
19
clearly display their effective interest rate, including other charges, to
consumers. This will promote free competition and consumer protection.
5.5 In order to systematically and appropriately regulate and develop
personal loan businesses in Thailand, detailed studies should be
conducted.
This must involve supporting officers on study trips to
investigate this type of business (as well as the operation of credit
bureaus) overseas in countries such as Japan and the USA that already
have a proven track record.
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Guidelines for Development and Regulation of Personal Loan
Companies
Method
Expected Results
1 Create regulations that
recognise the importance of
credit scoring and the
transparency of business data
to customers.
The business is developed
and grows systematically;
consumers are protected
and entrepreneurs are able
to operate their business.
2. Develop the credit bureau
to make it more effective than
present.
Financial discipline of
customers is facilitated
(adapt financial discipline
to financial cost)
3. Develop regular
investigations by regulatory
body.
4. Financial institutions use
data from credit card to
consider loans (Risk-based
Pricing).
5. Facilitate people towards
financial discipline by paying
importance to good credit.
Investigation of
entrepreneurs is conducted
effectively and regularly.
Operation cost of business
providers is reduced, which
is advantageous to
customers.
Low incomers have chance
to ask for unsecured loans.
People can borrow money
on good terms so they can
better manage debt burden
and decrease NPL.
Government can raise more
income from specific
business tax.
21
Part III Full Study on Personal Loan Companies
1. Background
In this case, personal loan companies refer to unsecured loans,
which have developed alongside credit card companies.
Financial
institutions that operate a credit card business usually operate a
simultaneous personal loan business. In 2005, personal loan companies
were not under precise rules or regulations, so the Bank of Thailand and
Ministry of Finance was trying to pass laws that will standardise their
business
operation,
protect
consumers
against
exploitation
by
entrepreneurs, and prevent the excessive expansion of household debt,
which could, if uncontrolled, become so acute as to cause serious impacts
upon the economy.
Similarities between Credit Cards & Unsecured Personal Loans
▪ Both are loans without collateral or personal securities.
▪ Both can facilitate immediate liquidity to service users in emergencies.
Differences between Credit Cards & Unsecured Personal Loans
▪ Target different groups of customers. (Credit cards are for those who
have minimum income of 15,000 Baht/month; whereas, most
unsecured personal loans are for customers with incomes of less than
15,000 Baht/month.
▪ Main utilisation is different. (Credit cards are for buying goods from
shops that accept the card and are mainly used instead of cash;
whereas, an unsecured personal loan is a lump sum or credit limit for
customers’ daily life or as an emergency source of cash.)
Source: Kasikorn Research Centr,2005
22
1.1 Types of Personal Loan
Personal loans can be divided into 2 types; secured loans
such as housing loans and leasing loans, and unsecured loans. Since the
end of 2002, many providers have paid more interest to unsecured loans
due to the passing of stricter laws controlling the credit of credit card
companies. This has made business providers look for alternative ways
not to affect their customer base. Unsecured loans don’t need collateral or
personal securities, thereby increasing liquidity and facilitating consumers
when necessary or during emergencies.
In this respect, unsecured
personal loans can be divided into 2 types, term loans and overdrafts.
1) Term Loans are lump sums or cash released to customers
at one time with a predetermined period and fixed value of instalments to
pay off the debt. Each provider will determine the maximum time to pay off
the debt, such as 3 years or 5 years, and the minimum period of time to
close the account of the loan payment; for example, it may be prohibited to
close the account within 6 months otherwise the customer may have to pay
a fine or cover all designated charges. Most term loans are granted for
specific purposes that are necessary in customers’ daily lives, such as
house repairs, education, or travel.
2) Overdrafts are current account credit limits granted to
customers in an emergency. They are suitable for businesses or people
requiring immediate reserve credit limits when withdrawing cash, within the
credit limit, through ATM machines or cheques. The repayment term is not
fixed as with term loans. In this respect, the interest rate for this type of
loan is usually higher since they are loans that increase customer
convenience for whatever reason the borrower determines. Likewise, the
credit limit is lower than term loans since it is supplementary credit that
injects temporary liquidity; term loans have higher credit limits because
they are deemed to be more necessary – they incur charges from the
beginning of the loan.
23
Figure 8 Categories of Personal Loans
Personal Loan
Secured Loan
Unsecured Loan
Term Loans
Overdrafts
2. Roles and Size of the Industry
The amount of outstanding household debt in Thailand in 2004
totalled 2 billion Baht, which equated to 33% of GDP. The total value of
personal loans was 621,000 million Baht or 31% of all outstanding loans
(Fig. 9), of which 67% was secured loans (approximately 445,000 million
Baht) and 33% unsecured loans (175,000 million Baht). The market size
of credit card businesses was 118,000 million Baht. Within the unsecured
personal loan market, NBFI providers account for only 20% of the market
or 36,422 million Baht, whereas banking providers hold 80% of the market
or 139,531 million Baht. The total number of customers using unsecured
loan services (both bank and non-bank) was 3.85 million, of which 2 million
or 52% were commercial bank customers, and 1.85 million or 48% were
NBFI customers. This is because NBFIs tend to deal with customers with
incomes of less than 15,000 Baht/month (1.26 million or 70% of all
customers).
24
Figure 9 Outstanding Loans in Thailand, 2004
Outstanding
Loans inทย
Thailand,
2004านบาท)
ปริมาณสินเชื
อคงคางในประเทศไ
่
ป 2547(พันล
31% (175,000 million Baht) was
unsecured loans (total personal
loans was 621,000 million
Baht).
31%
52%
6%
11%
Housing
สินเชื
อที
่ อยู
่ Loan
อาศัย

Car Hire-
purchase
สินเชื
อเชาซื
่
อรถ
้
Credit
บัตรเครดิต
Card
Personal
สินเชื
อบุคคล
่ Loan
Personal Loans
Secured Loans
Unsecured Loans
(445,000 million Baht)
(175,000 million Baht)
Source: Bank of Thailand
The income structure of Thailand’s population (Fig. 10) shows that
those having an income lower than 7,500 Baht/month accounted for 11.7
million people (excluding self-employed business - 24 million if included).
It is this portion of the population who may be influenced if there is stricter
control of the personal loan business (determining interest rate ceiling or
minimum income). Therefore, before designating policies or regulations
consideration should be given to the effect they may have on low incomers
since they form the majority of the working population.
25
Figure 10 Income Structure of Permanent Income Population, 2004
(Total 15.64 Million)
1.21 million
2.35 million
8%
0.245 million
2%
15%
11.72 million
75%
Less than
7,500
นอยกว
า7
บาท
,500Baht
Baht
บาท
77,500
,500–-15,000
15,000
15,000 -30,000 Baht
1
5,000- 30,000บาท
More than
30,000
มากกว
า3
บาท
0,000Baht
Source: National Statistical Office
The development of personal loan companies will decrease blackmarket loan businesses since people will turn to borrowing money from the
legitimate market. People will thereby benefit from lower interest rates as
well as being consumer protected – this will decrease the problems of
exploitation.
Personal loan companies also help increase domestic
consumption and may help as a source of capital loans for housing
purchases and educational investment for the low-income population.
However, there should be controls to manage suitable consumption and
investment. For example, if consumers purchase luxury goods above the
necessity of personal loans, this will mean an ultimate reduction in future
income and may cause negative effects on the national economy. The
ratio of bad debt to GDP will increase and many economic problems will
follow.
26
Market Share of Personal Loans for Commercial Banks and NBFIs
Classified by Income Level of Consumers – 30th June, 2004
Outstanding Personal Loans
Number of Personal Loans
(million Baht)
Customers (capita)
Income per month
Bank
Non-Bank
Total
Bank
Non-Bank
Total
Less than 7,000 Baht
6,191
4,172
10,363
424,329
415,390
839,719
7,000 - 10,000 Baht
6,866
5,814
12,680
345,416
491,302
836,718
10,000 - 15,000 Baht
9,914
7,383
17,302
360,205
359,890
720,095
15,000 - 25,000 Baht
18,077
8,746
26,823
386,464
319,231
705,695
More than 25,000 Baht
98,483
10,302
108,785
393,278
239,044
632,322
Total
139,531
36,417
175,953 1,909,692 1,824,857 3,734,549
Figure 11 Outstanding Personal Loans (Million Baht)
120,000
10,302
100,000
80,000
60,000
98,483
40,000
20,000
8,746
4,172
6,866
7,383
18,077
0
9,914
5,814
6,191
< 7,000
10,00015,000>25,000
7,000 7,0007,000 10,000
15,000
นอยกวา
มากกวา
10,000
15,000
25,000
10,000 บาท 15,000 บาท 25,000 บาท 25,000 บาท
บาท
ตอเดือน
Bank
Non-Bank
27
NPL of Personal Loans for Commercial Banks and NBFIs Classified
by Income Level of Consumers – 30th June, 2004
Number of NPL customers
Income per
month
Less than
7,000 Baht
7,000 - 10,000
Baht
10,000 15,000 Baht
15,000 25,000 Baht
More than
25,000 Baht
Total
Outstanding NPL
Bank
Non-Bank
Total
Bank
Non-Bank
Total
32,405
24,653
57,058
853
1,027
1,880
21,853
28,450
50,303
607
223
830
15,582
20,728
36,310
616
360
976
10,466
13,487
23,953
629
299
928
17,041
8,262
25,303
10,830
260
11,090
97,347
95,580
192,927
13,535
2,169
15,704
Figure 12 Number of NPL Customers of Personal Loan Consumers
(Capita)
60,000
50,000
24,653
40,000
28,450
30,000
20,000
10,000
20,728
8,262
13,487
32,405
21,853
15,582
17,041
10,466
0
7,00015,00000บาท 7,000- 10
,000บาท 10,00010,000- 15,000 15,000
- 25,000
นอยกวา<7,07,000
10,000
15,000
25,000
บาท
บาท
Baht/month
Bank
Non-Bank
>25,000
25,000
มากกวา
บาท ตอเดือน
28
Figure 13 Outstanding NPL of Personal Loan Consumers
Classified by Income
4,614 Million
4,614
Baht ลานบาท
(29%)
, 29%
11,090
11,090 ลาน
Million
Baht
71%
บาท,(71%)
< 25,000
Baht บาท
นอยกว
า 25,000
> 25,000
Baht บาท
มากกว
า 25,000
Figure 13 shows that most outstanding NPLs come from borrowers
who have an income of more than 25,000 Baht per month, numbering just
25,303 cases.
If calculating NPL per case, this equates to 470,000
Baht/capita. However, the number of borrowers with an income of less
than 25,000 Baht per month with bad debts accounted for 148,908 cases,
equating to 31,000 Baht per head.
If looking at the ratio of bad-debt
customers to personal loan customers, it is found that the percentage of
bad-debt customers who have incomes of less than 25,000 Baht per month
(approximately 3.58 million) is 3.8%. In comparison, the proportion of baddebt customers who have incomes of more than 25,000 Baht per month is
0.65%. Therefore, if when looking at bad debt per capita, it is those who
have higher incomes that are the worst offenders; however, if looking at
the overall picture of who is most likely to have bad debt, it is those who
have a lower income who come out worse.
29
Typical Unsecured Personal Loan Interest Rates in Foreign
Countries
Country
Interest Ceiling
Hong Kong
60.00%
Korea
66.00%
Remarks
Financial cost is lower than for
Japan
29.20%
loan providers in Thailand 3.04.0%
USA
36.0%
Italy
37.5%
Taiwan
20%
Interest Ceiling set According to
Credit Limit
Interest Ceiling set According to
Credit Limit
For NBFI providers, interest rate
(only commercial banks) ceiling is set at 30%
Interest rates of personal loan providers for each country, as shown
in the table above, show that rates (including other charges) are similar to
that in Thailand; however the ratio of household debt to income for each
country is, on average, higher than in Thailand. Thailand has a ratio of
household debt to income of 60% whereas Japan stands at 138%. Korea
has a ratio of household debt to income twice that found in Thailand. The
USA has a ratio of household debt to income of 120% whereas Australia
stands at 135%. Most of these countries have no rules or regulations to
control personal loans.
However, Japan started controlling unsecured
personal loans in 2000 by determining the interest rate at 29% (formerly
40%) which caused low-incomers to no longer be able to acquire loans
from personal loan providers; they instead turned the services of the black
market. This caused an increase in criminal actions and violence related
to the demands of debt repayment to loaners in the black market, and with
30
it many social problems. The increasing rate of criminal cases is clearly
illustrated in Figure 14.
Figure 14 Criminal Cases - Black Market Loan Providers (Japan)
CaseValue(MillionYen)
Crimial CasesonBlackMarket LoanProviders
40,000.00
No. of Cases
400,000.00
30,000.00
300,000.00
20,000.00
200,000.00
10,000.00
100,000.00
0.00
0.00
1998
1999
2000
2001
Year
CaseValue(MillionYen)
2002
2003
No. of Cases
Source: Consumer and Environmental Protection Division, Community
Safety Bureau of Metropolitan Police, Japan
3. Weak Points, Strong Points and Structural Characteristic
of Market Players
The market structure of the personal loan business consists of 5
main players, non-bank financial institutions (NBFIs), commercial bank
institutions - including foreign commercial banks, Thai commercial banks,
and a few specific financial institutions (SFI), and finally black-market
providers. Business performance and operation of each market player
vary. They have different strong and weak points which influence various
target areas according to the performance of each financial institution.
31
Providers in the Market
Thai Commercial
Banks
Foreign Commercial
Banks
SFI
Black Market
Non-Bank
??
???
?
Structure for Determining Interest Rate of Personal Loans
Structure of Interest
Rate (%)
Bank
Non-Bank
AVG
Max
Min
AVG
Max
Min
Cost of funds
2.5
3.8
1.7
3
4.0
2.5
Operation Cost
13.2
19.1
2
11.8
19.0
3.6
Default rate
5.9
9
3.2
9.1
19.5
3
Margin
1.4
12.5
-9.2
1.5
6.6
-7.5
Interest Rate Suggested
23.0
39.0
12.6
25.3
35.0
14.0
32
Figure 15 Cost Structures of Unsecured Personal Loan Providers
1.4
5.9
100%
80%
60%
40%
20%
0%
1.5
9.1
Margin
13.2
11.8
2.5
3
Default rate
OperationCost
Cost of fund
AVG
AVG
Bank
Non-Bank
Personal loan providers have differing operational costs. The cost
of funds for banks is a little bit lower than it is for NBFIs. This may be
because banks can secure deposits that at a lower cost than NBFIs so
banks can show a higher competitive performance.
However, the
operational costs for banks are higher than for NBFIs. The default rate for
banks is almost 3% of the total cost lower than that of non-banks, which
means NBFIs have an average cost of operation 2% higher than banks.
33
3.1 Competitivess of Personal Loan Providers
Foreign Commercial Banks
Brand
Price
Strong Points
▪ Have good image as service providers.
Service
▪ Have service know-how as the leaders of the
market.
Product
▪ Have diverse innovations and new product
designs to meet customers’ demands.
Weak Points
▪ Have high interest rates and charges.
▪ Have limited channels to attract customers.
▪ Target low-risk customers - narrow market.
Credit
Thai Commercial Banks
Brand
Price
Strong Points
▪ Have low interest rates due to low cost of
Service
funds.
Product
▪ Have many branches and channels to
customers.
Credit
Weak Points
▪ Only take low-risk customers due to the
lack of unsecured personal loan knowhow.
Black Market
Brand
Price
Strong Points
▪ Take unlimited risk.
Service
▪ Easy, convenient, no hampering
Product
regulations.
Credit
Weak Points
▪ Very high interest rates.
▪ No service.
▪ Bad image with consumers.
34
Non-Bank
Service
Product
Strong Points
▪ Can take high risks due to in-depth
knowledge of the business.
▪ Can service low-income customers with
diverse products.
Brand
Price
Credit
Weak Points
▪ Financial cost is higher than others, lack of
competitive performance in terms of cost.
▪ Have
limited
channels
to
attract
consumers.
▪ So-so image with consumers, limited
operating performance may be greatly
affected if interest rate ceiling is
established.
SFI
Service
Brand
Price
Product
Credit
Strong Points
▪ Direct support from government, can take
high risks, and have low cost of funds.
▪ Have many branches, especially in
different provinces, can reach to lowincome customers easily.
Weak Points
▪ Have limited risk management which may
cause
problems
with
low-income
consumer risk evaluation, and high chance
of bad debt.
▪ Non professional image.
▪ Consumers do not know details of
products due to bad marketing.
Source: Krung Thai Credit Company
35
From the figures illustrating competitive performance for each
player in the personal loan business, it can be seen that 3 service
providers can take high risks, NBFIs, SFIs, and the black market.
Therefore, these providers have customers of medium to low-income.
Those who have incomes lower than the standard will tend to use black
market loans - apart from a lack of consumer protection, these people will
have to pay very high interest with a corresponding lack of opportunity to
acquire funds for necessary expenses.
36
Figure 16 Providers Classified by Customer Income and Demands
Consumers
Consumers’
Demands
Service
High
300,000
Product
Brand
Service Providers
Foreign
Commercial
Banks
> 60,000
Baht/month
Price
Credit
Service
Middle 4 million
Thai
Commercial
Banks
Product
Brand
15,000 – 60,000
Baht/month
Price
Credit
Non-Banks
Service
Mass
6 million
7,500 – 15,000
Baht/month
Product
Brand
Price
Credit
SFIs
Service
Low
24 million
Brand
Product
Black Market
< 7,500 Baht/month
Price
Credit
Source: National Statistical Office
The employed population as of January 2005 was 33.63 million. (National
Statistical Office)
It is a common business policy of unsecured personal loan
companies to pay attention to risk evaluation of consumers who ask for
loan. Each consumer has different risks. The reason for strict checks is
because providers have to reduce the chance of bad debt after releasing
the loan. This can be achieved by credit scoring since each provider has
37
already had to evaluate borrower risk. Therefore, new regulations should
place more emphasis on controlling the evaluation standards for releasing
loans rather than on controlling the interest rate ceiling.
3.2 Key competitive factors
To create competitive performance within the personal loan
business, key success factors are as follows:
1) Appropriate risk management including interest rate pricing
according to borrower risk.
2) Managing funding cost so as not to pay excessive interests
by considering fund raising abilities and opportunities that are appropriate
to current interest rates and inflation.
3) Controlling operation cost - especially that of personnel cost,
verification of clients’ risks, finding new customers, marketing, and pursuit
of debt payment - which are all rather high.
4) Interest rate and charges collected have to cover the risk
and operational costs. If an interest rate ceiling is inappropriately defined,
companies will be reluctant to take risks with low-income customers;
therefore they will change their target customer group to higher-income
customers only.
4. Effects on the Economy
People are turning to black market loans more than they ever did in
the past due to the high number of providers - this creates competition
among them both on price and service.
Clients receive many more
advantages when there is high competition. However, there should be
controls in place to prevent providers taking advantage of consumers and
to prevent them from releasing loans that could lead to more NPL in the
economy.
From 2002 to June 2004, average expense per household
38
increased from about 5.5%, whereas income increased by 4.4%.
Household debt increased by 11.7%. If looking at the overall picture, it
shows that the amount of income increased less than expense. However,
if this is further broken down according to social and economic status, it is
found that the income of agricultural households increased by 7.8% but
expense increased by only 7.2% with average debt increasing by 5.5%.
For labourers, the average income increased 1.8%, expense increased
6.8%, but average debt increased at the highest rate of 47.5%.
This
shows that the low-income population had average debt increases at a
much higher rate than average income increases. Since these households
have low incomes, they cannot easily access legitimate loan services.
This is reflected in the NPL of commercial banks, which stood at 11.57% of
all loans. In other words most of the debt owed by low-income households
was debt in the black market.
Figure 17 Growth of Average Income, Average Debt, and Average
Expense per Household
25.00%
21.80%
Growth Rate
20.00%
15.00%
10.12%
12.38%
10.00%
5.00%
2.93%
-10.00%
44.7%
55.3%
2002
2004
1.80%
0.29%
0.00%
-5.00%
8.81%
-3.81%
-4.55%
2000
-4.61%
2001
Source: National Statistical Office
Year
Average Income
Average Debt
Average Expense
39
Increasing household debt, which is reflected in the conflict in NPL
figures, can be explained by the fact that before releasing loans personal
loan providers consider the salary base and interest rates as important
factors since, statistically, low-incomers have higher default rates than
high-incomers.
Figure 18 Default Rates of Personal Loan Customers Classified by
Income
0%
5%
10%
15%
20%
Inco
>
15K7.5K< 7.5K
6.49
7.75
11.7
23.1
Average Source: Krung Thai Credit
Since low-incomers have higher default rates, low-income borrowers
of unsecured personal loans caused higher costs to providers than highincome borrowers. Therefore, if there is a determination of interest rate
ceiling, it will cause providers to turn to higher incomers, who have lower
costs and risks. The determination of an interest rate ceiling is therefore
similar to determining a minimum income of consumers.
40
Figure 19 Effect of Supply and Demand after Determining Interest
Rate Ceiling on Legitimate Loan Businesses
Interest rate charge
Supply
Legitimate Loans
E
I 0= X %
I1= 28 %
Demand
Unsatisfied Demand
Q1
Q0
Q2
Quantity of
Loans
Figure 19 shows the relationships between number of consumer loans
(demand) and number of loans provided (supply). E is the equilibrium of
demand and supply, with the interest rate at I0 and the number of loans at
Q0. With variable interest rate supply and demand alters. When setting up
an interest rate ceiling at I1, providers (supply) want to release loans only
at Q1.
However, the demand of consumers come rises to Q2, which
creates an unsatisfied demand at Q2 - Q1. The reason why providers do
not want to release loans is because when the interest rate ceiling is
determined, it will make providers unwilling to release high cost loans, in
other words, to low-incomers. This is because the chance of loans granted
to low-incomers becoming bad debt is higher than for those granted to
high-incomers.
Therefore, low-incomers cannot get the services they
require. According to figures on the income of government, private and
state enterprise employees (totalling 15.642 million people from an
41
employed population of 33.63 million), it is found that those who have an
income of less than 7,500 Baht/month account for 11.712 million or
78.59% of all employees (Fig. 21). These consumers thus turn to the black
market for loans. The black market is positively boosted (Fig. 20) since the
demands for loans from consumers increases from the former rate at D1.
When there is control by determination of interest rate ceiling, the demand
for black market loans will increase and shift towards D2. The interest rate
that black market providers charge to consumers will also rise from I1 to I2.
This shift in loan demands can be explained in Fig. 20.
Figure 20 Effect of Supply and Demand after Determining Interest
Rate Ceiling on Loan Businesses in the Black Market
Black Market Loans
Loan Interest
Supply
I2
I1
D2
D1
42
Figure 21 Population Structure Classified by Income
1.21, 8% 0.245, 2%
2.3503, 15%
11.712, 75%
นLess
อ ยกวาthan
บาท Baht
7,5007,500
บาท Baht
15,000
- 30,000
15,000
– 30,000
บาท Baht
7,500
- 15,000
7,500
– 15,000
มากกว
บาท
Moreา 30,000
than 30,000
Baht
Source: National Statistical Office
Unit: Million persons
Figure 22 Effects of Regulatory Rules Prescribed to Control Credit
Card and Personal Loan Companies
Credit Card Loan
Personal Loan
Black Market Loan
Employed persons having incomes lower than
7,500 Baht/month are approx. 24 million. (This
is 70% of 33.5 million employed persons in
Thailand in 2004)
Bureau of Financial System Policy, Fiscal Policy Office
Source: National Statistical Office
43
However, when considering the percentage of household debt to
GDP as classified by country (Fig. 23), Thailand still has a lower household
debt to GDP than neighbouring countries such as Malaysia, Hong Kong,
Singapore, and South Korea.
This can be looked at from several
viewpoints. An interesting issue is that these countries have developed a
system of loan businesses that are truly legitimate.
Their figures for
household debt therefore truly reflect the issue. In contrast, countries that
have little financial development, such as Indonesia and India, have very
few legitimate loan businesses – here the reported figure for household
debt to GDP is very low. One of the main reasons for this is probably due
to large numbers of unreported black market loans. When considering the
economic structure of Thailand, the figure for household debt to GDP
should be close to that of Malaysia. Since it isn’t, it is possible that some
of the household debt has not been reported and is supposedly black
market loans. This type of debt not only causes consumers to pay high
interest rates, but the government also loses several billions of Baht per
year through lost taxes.
44
Figure 23 Ratio of Household Debt to GDP (%)
Ratio of Household Debt to GDP % (for Each Country)
Singapore
85
USA
84
Australia
84
77
UK
63
Malaysia
62
S. Korea
Hong Kong
60
33
Thai
Indonesia
10
India
6
0
10
20
30
40
50
60
70
80
90
Ratio of Household Debt to GDP (%)
Source: National Statistical Office
5. Suggestions for Development and Regulation
5.1
Overall Guidelines for Development and
Regulation
The study team makes the following suggestions.
5.1.1 Determination of maximum credit limit not
over 5 times that of income.
45
The study team suggests that, in principle, there should
be a determination of maximum credit limit in ratio to the income of
borrowers.
In this respect, if the control of household debt is
conducted efficiently so as to actually reduce the risk to the overall system,
it is necessary to control the overall debt formation in all financial
institutions of each borrower to a suitable level. This can be achieved by
preventing the formation of debt exceeding 5 times the income of the
borrower at all financial institutions together. Therefore, it is necessary to
have an efficient credit data system in order to allow providers to check
data equally and fairly, thereby eliminating problems asymmetric
information.
All personal loan service providers shall be required to
become members of the credit data bureau, and collation of credit data for
each customer shall be conducted according to the law. Information will
be used to efficiently control the level of household debt of the nation.
Moreover, any charges of the credit data bureau should
be of an appropriate level in order to promote broad and wide-ranging
usage of their information.
Additional and necessary information that
members must release to the credit data bureau should include information
on debt formation behaviour, payment behaviour, and other debt burdens.
5.1.2 Determination of Interest Rate Ceiling
These guidelines may cause personal loan providers to
avoid offering loans to low-incomers for 2 reasons. Firstly, to release loans
to low-incomers has operational costs per credit limit higher than for highincomers, since low-incomers have the ability to ask for lower loans
whereas operational costs for each case are fixed.
As a result, the
proportion of operational costs to credit limit of low-incomers is higher than
that of high-incomers. Secondly, low-incomers have high default rates.
This assumption comes from studies that indicate that the number of NPLs
owed by those with an income of less than 15,000 Baht/month and using
personal loan services total 143,000 cases or 74% of all NPLs.
46
Operational costs must therefore rise accordingly. From these reasons,
the cost of granting loans to low-incomers is higher than that for highincomers. If the interest rate ceiling is determined by using the average
cost of providers, without calculating the actual cost, service providers will
then have to reduce costs by avoiding offering loans to low-incomers in
order to fall within the determined interest rate ceiling. This will provide
low-incomers with less opportunity to obtain legitimate loans, which runs
counter to government guidelines that propose increasing the opportunities
for low-incomers to benefit from the system.
However, if it is necessary to control the release of
personal loans in order to maintain overall financial stability, it may be
possible to prescribe rules that control the interest rate ceiling for
commercial banks only. This is to prevent financial institutions that receive
deposits from people release excessively high risk loans and thereby
possibly affect the overall stability and security of the financial system and
become a burden to the government.
5.1.3 Consumer Protection
Rules related to the transparency of information for
consumers should be stipulated to allow consumers to use the service
without fear of hidden cost.
For example, providers should indicate
effective rates rather than flat rates, and any interest rate quoted to the
customer should already include any other charges. Providers should also
indicate the methods for calculating effective rate should the consumer fall
behind in making repayments. Consumers should also be informed of the
effective rate charged by providers in case of default of performance
before using the service. This would provide a greater level of consumer
protection and prevent providers taking advantage, especially in cases of
default performance. To create equity for consumers, all personal loan
providers should be required to abide by the rules and regulations of
consumer protection as prescribed by the law.
47
Moreover, there should be a determination of the
maximum credit limit of consumers by stipulating that all personal loan
providers shall become members of the central credit data bureau and
pass on credit data of each customer in accordance with the law in order to
more accurately control the level of household debt. A suitable level for
charges by the credit data bureau should be considered.
In addition,
members should be required to submit other information to the credit data
bureau such as other debt burdens (total credit limit, number of financial
institutions, total outstanding liabilities, monthly instalment burdens, and
type of debt owed by the customer), and debt creation behaviour (number
of cancellations of loans by approvers, regularity of 90-day overdue
notices, and percentage of debt repayment).
Regulatory laws should be passed; however, guidelines
for drafting these laws should focus upon these 4 important issues.
1) Promotion of credit scoring standards by personal loan
providers in order to assist in future risk-based pricing determinations.
2) Fair and transparent consumer protection that is easily
verifiable by consumers. Personal loan providers shall follow the rules and
show equality to all.
3) All providers under ministerial regulations shall be
members of the credit data bureau and shall pass on customer information
to the system in order to increase the efficiency of the credit data bureau
and reduce financial risk to all. The charge for using the credit data service
is an important factor that must be considered.
4) Research and development of a more effective credit
bureau must be supported.
48
Form of Personal Loan Development
Regulators
Business
Providers
Development of Credit
Scoring
Development of
Operational Investigation
Transparency of Credit
Data to Consumers
Improvement of Credit Bureau
Improvement of Credit Bureau
1) Merge credit bureaus for economy of scale and cost reduction of
entrepreneurs.
2) Add data to the credit bureau so as to include public sectors such as
payment of water, electricity, telephone, and tax etc.
3) Develop data collection by acquiring credit data of consumers every
half-year in order to allow consumers to know their own credit status
before asking for loans from financial institutions. This will increase
the financial discipline of consumers.
4) Establish an auditing committee to maintain standards at the credit
bureau by checking data that members send from their offices every
month. This will promote the regular updating of data and prevent
sending incorrect data to the bureau.
5) Establish efficient development of credit scoring to reduce the risk
and cost incurred by providers of releasing loans. Consumers will
be charged lower interest rates and receive better service due to
free competition.
6) Ensure the credit bureau issues central credit ratings for each
consumer in order to establish a benchmark for members - members
49
will therefore gain many advantages from being members of the
credit bureau.
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