Thai Credit bureaus and post-1997 financial system reform (15-05-07)
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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Non-Performing Loans (NPLs) can be a significant drag on an economy as Japan found out during the 1990s (See Japanese asset price bubble and the lost decade of the 1990s [overview1, overview2, paper1, paper2], the photo on the right is from one of the numerous post-1997 repossessed real estate auctions around Thailand).
NPLs are essentially loanable money that could be supporting productive investments but currently are not.
To the extent that banks fail to write off these losses in a timely fashion the economy will fail to perform as well as it could perform.
Even better is to not make loans that will turn into NPLs in the first place, perhaps easier said than done.
Credit bureaus and credit ratings can reduce the occurrence of NPLs.
They aren't perfect though.
Injustices do occur. Sometimes the wrong information gets into someone's credit history and it may prove impossible to reverse.
The threat of a bad credit rating is sometimes used to force borrowers to pay up, but this has to be reckoned far better than the threats of violence used by loan sharks.
Credit ratings are even used, more controversially, as a measure of character by potential employers.
In Thailand credit bureaus are part of a much broader trend of financial system reform after the 1997 Asian Economic Crisis. (See this recent paper on Thai financial system reform, especially pages 13-15)
As today's article notes, finding ways for consumers to build up their credit rating again after economic crises could make credit ratings less controversial. less intrusive, and more acceptable.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What changes in credit information collection have been proposed recently?
2. What changes have been proposed to deal with those on credit blacklists?
(Read whole article first)
3. When and why were credit bureaus first created in Thailand?
4. What kind of credit information on consumers is collected?
(Read whole article first)
5. Who collects consumer credit information?
6. Where is credit information collected from?
7. How many credit bureaus does Thailand have?
8. What misunderstanding do consumers typically have regarding the function of credit bureaus?
9. What has the effect of credit bureau information been on the rate of loan rejections?
10. Would it be fair to blacklist a young consumer for being late with a 1000 baht payment on their mobile phone? Brainstorm other examples and discuss.
(Express your opinion)
11. When evaluating a loan application are the excuses given for a late payment important? (Express opinion)
12. Should loans be rejected solely on negative information from a credit bureau? (Express opinion)
13. What kind of background information about consumers should be incorporated into a credit scoring system for evaluating loan applicants? (Express opinion)
14. What other kinds of laws would support credit risk evaluation in real estate loans? Why?
15. What incentives can help low-income consumers obtain loans? What precedent is there for such a policy?
16. List the factors used to reject loan applications and rank them in importance.
17. What is the general rule for monthly payments and a consumer's income?
18. If credit card debt was included in credit evaluation would the loan reject rate go up or down? What implications might this have for Non-Performing Loans?
Bangkok Post Article May 15, 2007
BANKING CREDIT BUREAU LAW DEBATED
More data on borrowers urged DARANA CHUDASRILaws governing credit information and the national credit bureau could be amended to allow greater collection of data regarding consumer credit and default patterns, according to lawmakers. At the same time, ways should be found to assist borrowers who have been placed on bank "blacklists" to clean up their records and return to the credit market.
Sungsit Piriyarungsan, chairman of the finance and banking committee at the National Legislative Assembly, said many people misunderstood the concept of a credit bureau.
Credit bureaus were developed in Thailand following the 1997 economic crisis to allow financial institutions to more accurately assess the risks of lending to consumers.
Under the current law, financial institutions regularly submit information about credit lines and payment histories to the National Credit Bureau Co, the country's sole credit bureau.
"But consumers typically misunderstand the purpose of the bureau, and think that the concept only refers to how lawyers can intimidate borrowers to make payments," Dr Sungsit said yesterday at a seminar held by the NLA on the credit bureau law.
He said the law should be amended to allow the bureau to maintain more accurate and comprehensive records about borrowers, including the factors behind credit defaults.
"More accurate information would actually help borrowers who have been blacklisted to return to the credit market," Dr Sungsit said.
"Property developers say that the percentage of commercial bank loan rejections has risen steadily to around 30% due to the credit bureau. And we see that many young people are registered in the blacklists just for making late payments of, say, one thousand baht on their mobile phones."
Atip Bijanonda, president of the Thai Condominium Association, agreed the bureau should also track information such as why a borrower was late on payments or why a loan application was rejected.
Information on risk ratings and risk sharing among financial institutions should also be factored into credit analysis for the benefit of all systems, he added.
"[Lenders and property developers] never really know the reason why some customers turn into non-performing loans," Mr Atip said. "Some bank officers reject loan applications only by citing data from the credit bureau, but don't offer any more detail."
Kitti Patpongpibul, president of the Housing Mortgage Association, said insufficient information within the system put pressure on institutions to adopt a conservative stance in evaluating loans.
Improving the quality of information available about a customer would actually help borrowers by allowing more accurate assessments of credit risk.
"The current credit information provided by the credit bureau isn't sufficient for banks to create a credible credit scoring system for all types of loans," he said.
Mr Kitti recommended that laws permitting escrow accounts and controlling property valuation should also be passed to improve efficiency and reduce risks in credit analysis and property transactions.
At the same time, he said, the government should consider ways of helping low-income residents obtain credit. "For instance, bonus rewards could be offered to the poor who set aside savings for new home loans. These bonuses could be tailored based on the economic situation and the priorities of the government."
In Germany, he noted, authorities offered bonuses of up to one-quarter of the funds saved by a qualified borrower under a policy to assist the public to purchase homes and gain access to the credit market.
But Chatchai Payuhanaveechai, a senior vice-president at Kasikornbank, said only 26% of credit applications were rejected based on information from the credit bureau. "In 47% of all rejections, insufficient income is the main reason why a loan is rejected. Failing to pass credit scoring accounts for another 10%, and other factors comprise the rest," he said.
In general, Mr Chatchai said, monthly home mortgage payments should not exceed 40% of a borrower's income.
"And these figures exclude credit-card debt obligations that are recorded with the credit bureau. Banks typically exclude credit cards when evaluating home loans. If credit card data were taken into account, we would likely see even higher loan rejection rates for mortgages than we have now, and that could be a problem."
Vocabulary (in discussion above)
a Non-Performing Loan (NPL) - a loan that has not had loan payments made in a long time
write off, write off a debt, write off a loss - accept that you are going to lose the money and take appropriate action (usually adjusting accounting records to reflect the loss)
in a timely fashion - happening without delay (while it is still useful, effective and relevant)
credit - paying for goods in the future, borrowing to pay for goods, moeny loaned out, debt (See Wikipedia on credit and a list of entries on credit)
a credit bureau - a company that collects financial and credit information on individuals and reports this information to organisations such as banks that need to assess the credit risk of the individual (See Wikipedia)
credit rating - a measure of credit worthiness, a measure of the risk of loaning to (See Wikipedia)
credit history - a record of whether a person has paid their loans back on time and their monthly bills on time (See Wikipedia)
credit information - same as credit history
credit scoring system, a credit score - calculating a measure of credit worthiness from a person's credit history obtained from a credit bureau (See Wikipedia on credit score, and credit scorecard)
a credit line, a line of credit - a promise to lend up to a limit during a period of time without making a new application for a loan, provides quick access to capital
credit risk - the risk of a person not paying back a loan (See Wikipedia on credit risk, consumer credit risk, adverse credit history)
consumer credit - money lent to individuals to buy things like cars things at Carrefour, Lotus, and Big C like refrigerators or washing machines (See Wikipedia on consumer credit and credit card)
a loan shark - a person who makes illegal loans at high interest rates, often backed by threats of violence (See Wikipedia)
repossess real estate - when a lender becomes owner of real estate after failure to pay back a loan
default (on a loan) - violate loan contract, not make loan payments on time (See glossary and Wikipedia)
a blacklist - a list of people who are restricted from doing things because they have done something wrong
payment history - record of loan payments, whether payments were on time, and whether you defaulted on payments (usually over three months late)
National Credit Bureau Co - Thailand's credit bureau (the only one)
intimidate x - make x do what you want by frightening them
a seminar - a meeting where a problem or issue is discussed, a small university course with a small group of students who dicsuss certain related issues and problems
comprehensive - thorough, covers all relevant areas
Thai Condominium Association - industry association for condominium developers in Thailand
track information - investigate, find information about (follow and watch for changes in information)
factored x in y - use x in decision or calculation y
a stance - a attitude or opinion
a conservative stance - a cautious attitude
adopt a conservative stance - be cautious
an assessment - evaluating, ranking, grading, judging how good something is
credible - able to be trusted and believed
escrow - when a third person (escrow agent) keeps the money (or asset) in a transaction between two people until certain conditions are met (See Wikipedia on escrow)
real estate closing in escrow - a safe method for making a real estate buy and sell transaction, a title company or a lawyer holds the money and the signed deed to the property and arranges for the transfer of ownership, this ensures an orderly transaction, or if something goes wrong, an orderly termination of the agreement, a title search is also made to make sure there are not bank liens on the property (a clear title) and mortgage insurance is issued to guarantee ownership (See Wikipedia on real estate closing)
escrow accounts - an account set up with a real estate loan to receive payments for taxes and insurance (this account ensures that these payments are made so that neither tax authorities nor insurance companies can get an ownership claim on the property due to unpaid taxes or insurance payments; See Wikipedia on escrow payments)
property valuation - estimating the value of real estate, also known as real estate appraisal - (See Wikipedia on real estate appraisal and appraised value)
tailored - changed to fit, made suitable for a person or use (a tailor's job is to fit cloths to someone's body)
comprise - are parts of, are members of
mistake x with y - think x is y, but it isn't
precedent for x - something similar to x that happened before, that therefore justifies x
implications of x - other things which must be true, because x is true
Answer Key:
1. What changes in credit information collection have been proposed recently?
"Greater collection of data regarding consumer credit and default patterns," has been proposed.
2. What changes have been proposed to deal with those on credit blacklists?
(Read whole article first)
a. A search has been proposed for ways to help borrowers on credit blacklists "clean up their records and return to the credit market."
b. More accurate information may help blacklisted consumers return to the credit market.
("More accurate information would actually help borrowers who have been blacklisted to return to the credit market," Dr Sungsit said."
3. When and why were credit bureaus first created in Thailand?
Credit bureaus were developed after the 1997 economic crisis (in the wake of massive loan defaults) to "more accurately assess the risks of lending to consumers."
4. What kind of credit information on consumers is collected?
(Read whole article first)
More accurate and comprehensive information about:
a. Credit lines.
b. Payment histories.
c. Factors behind credit defaults.
("He said the law should be amended to allow the bureau to maintain more accurate and comprehensive records about borrowers, including the factors behind credit defaults.")
5. Who collects consumer credit information?
Credit bureaus.
6. Where is credit information collected from?
From financial institutions.
7. How many credit bureaus does Thailand have?
Thailand has one credit bureau named the "National Credit Bureau Co".
8. What misunderstanding do consumers typically have regarding the function of credit bureaus?
Consumers typically mistake credit bureaus with the way in which lawyers "intimidate borrowers to make payments," perhaps because these lawyers tell people their credit rating will be affected or they will be blacklisted which may in fact be true.
("But consumers typically misunderstand the purpose of the bureau, and think that the concept only refers to how lawyers can intimidate borrowers to make payments")
9. What has the effect of credit bureau information been on the rate of loan rejections?
The rate of loan rejections has "risen steadily to around 30% due to the credit bureau."
("Property developers say that the percentage of commercial bank loan rejections has risen steadily to around 30% due to the credit bureau.")
10. Would it be fair to blacklist a young consumer for being late with a 1000 baht payment on their mobile phone? Brainstorm other examples and discuss.
(Express your opinion)
11. When evaluating a loan application are the excuses given for a late payment important? (Express opinion)
12. Should loans be rejected solely on negative information from a credit bureau? (Express opinion)
13. What kind of background information about consumers should be incorporated into a credit scoring system for evaluating loan applicants? (Express opinion)
14. What other kinds of laws would support credit risk evaluation in real estate loans? Why?
a. Escrow accounts: Also if a land claim is not fully researched and insured, and there is not clear title to the property, the bank may be offering a loan for property value that really doesn't exist. For example, a local mafia figure or loan shark may have loaned money on the property. This case actually happened to me, but I used a villager to search for information first.
b. Controlling property valuation: Innaccurate property valuations mean that if a bank repossesses a property it won't regain the full value of the loan.
15. What incentives can help low-income consumers obtain loans? What precedent is there for such a policy?
Monetary rewards can encourage low-income people to "set aside savings for new home loans." Germany has used such incentives.
16. List the factors used to reject loan applications and rank them in importance.
47% - Insufficient income
26% - Information from credit bureau
10% - Failure to pass credit scoring
17% - Other factors
17. What is the general rule for monthly payments and a consumer's income?
To qualify for a loan "monthly home mortgage payments should not exceed 40% of a borrower's income."
18. If credit card debt was included in credit evaluation would the loan reject rate go up or down? What implications might this have for Non-Performing Loans?
If credit card debt was included in credit evaluation, the loan reject rate would go up.
Although not stated in the article, credit card and other forms of debt which are not included in credit evaluation might be a factor in Non-Performing Loans.
("And these figures exclude credit-card debt obligations that are recorded with the credit bureau. Banks typically exclude credit cards when evaluating home loans. If credit card data were taken into account, we would likely see even higher loan rejection rates for mortgages than we have now, and that could be a problem.")
