Government policies can only do so much, as spending is a matter of personal choice and freedom
THE government has recently announced a slew of initiatives aimed at helping Singaporeans have a financially secure retirement, including increasing the CPF interest rate, raising the withdrawal age for the CPF minimum sum and introducing compulsory annuities purchase, among others. Looking at these measures, one observes that they are primarily devised to encourage Singaporeans to save more for retirement. While such initiatives are welcome and will go some way towards helping Singaporeans retire comfortably, these measures alone may not be sufficient.
Laying the foundation: In order to help Singaporeans plan for a comfortable retirement, efforts need to be taken to educate and encourage Singaporeans to be more savvy and prudent in their spending habitsSaving is only one side of the coin, spending being the other. Assuming the average individual saves one-third of his or her income and spends the rest, it is obvious that focusing on the former alone will only address one facet of the issue, and neglect the latter, which is an equally, if not more important aspect.
Therefore, to help Singaporeans plan for a comfortable retirement, efforts need to be taken to educate and encourage Singaporeans to be more savvy and prudent in their spending habits.
However, there is a limit to what the government can do in this area. While the government can introduce legislation and initiatives to raise savings requirements, it has much less control over spending, which is viewed as a matter of personal choice and freedom.
This is where the industry has an indispensable role to play. The retail finance sector can complement government initiatives by helping Singaporeans learn some money management basics and to understand the value of having greater discipline in spending. The latter in particular, is an area that needs to be emphasised, with the increasing proliferation and growing popularity of credit products.
Prudent spending
Already, Singaporeans are among the most financially leveraged in the world, which is no surprise given Singapore's high level of home ownership. Over 22,000 people fork out more than their CPF contributions in home loans per month, and one in five active CPF members above the age of 55 are still paying off their home loans.
There are signs that credit will become even more popular in future. According to the Credit Bureau of Singapore, young Singaporeans in their 20s have posted the fastest rate of increase in credit card usage among all age groups, jumping from 14 per cent in 2005 to 20 per cent in 2006.
Encouraging prudent spending has also become more urgent with the recent liberalisation of the consumer finance sector. An increasing array of credit products targeted at youths and the sub-prime segment, who are more vulnerable and less financially savvy are being introduced with attractive incentives to draw customers.
Amid this consumer landscape, the public finance sector has already contributed to promoting financial education through MoneySENSE, the national financial education programme, which brings together industry and public sector initiatives to enhance the financial literacy of consumers in money management, financial planning and investment.
Most recently, the Credit Bureau of Singapore (CBS), a joint venture between the Association of Banks and DBIC Holdings Pte Ltd, has also announced that consumers will be able to obtain statistics that will allow them to compare their level of credit exposure against those of others in the same age group. This will enable consumers to gauge where they stand among their peers in their level of debt commitment.
Such initiatives are always helpful, but there is much more that can be done by retail financial institutions beyond contributing through initiatives conceived by industry associations.
CBS statistics have indicated that 27 per cent of credit card holders are not meeting their monthly payments, of which 10 per cent only meet the minimum payment each month. What must be highlighted is a bad rating by the CBS, can affect one's future ability to apply for loans, when there is a real genuine need such as skill enhancement courses, setting up a home, or even getting a basic HDB housing loan. There are huge opportunities for industry players to make significant, direct contributions to helping consumers and advancing the national agenda by aligning their core operations to the principles of responsible lending.
This would require a commitment to help Singaporeans borrow responsibly, especially in times of real need, by helping individuals fully understand the terms of the loans, and the different fees and charges that apply.
Another key factor will be to help customers carefully assess their ability to repay their debts. From a consumer perspective, it is a basic expectation that they have of the industry and such basic advice is actually what they need most. By helping consumers borrow responsibly, industry players not only help consumers meet their immediate financial needs, but also facilitate their future requirements at different stages of life. Building a good credit history may not be important to an individual initially, but it will help them and are first steps toward building a better future for themselves and their families.
Practising responsible lending involves two key aspects - instituting rigorous credit assessment procedures and increasing product transparency.
Bad credit
With the liberalisation of the consumer finance market, industry players are responsible for ensuring credit assessment standards are not compromised in their bid to gain market share. They have to look beyond immediate profit considerations and take a long-term view to understand the benefits of instituting good credit assessment procedures.
From our experience as the incumbent providing for the segment with income levels of $20,000 to $30,000 per annum, having a comprehensive interview and customer-focused processes have enabled GE Money to provide appropriate and attractive loan products. Effective credit assessment procedures have also helped our customers to minimise defaults, hence avoid unnecessary late payment charges and more importantly, the bad credit history that will affect his or her ability to borrow when there is a situation in life that warrants a loan. The objective reassurance for our customers that they will be able to repay the debts, allaying one of their major fears and thus removing a big psychological barrier towards taking loans has always been important for us as a consumer finance company in Singapore focused on responsible lending.
Another key point in this discussion is product transparency. Product transparency has become an imperative as financial products become increasingly complicated and too complex for the lay person. Industry players need to practice fair and transparent processes, by providing straightforward information that makes the terms of the loan clear and easily understood so that consumers understand the full implications.
Through face-to-face interviews, and a two-way conversation, GE Money advises applicants about the financial commitment they are making, highlighting the fees and charges applicable, and helps applicants consider their ability to repay the loan without incurring additional charges. Key points regarding the loan are explained in detail and without industry jargon so applicants understand all terms such as default interest rates and termination fees.
Ensuring product transparency is in the best interest of industry players. It helps win consumers' trust - the most-valued commodity in the industry and consumers' primary consideration when taking up a loan.
Ultimately, ensuring borrowing and lending continue to take place responsibly is both the industry's social responsibility and a key business imperative. By increasing product transparency and instituting good credit assessment procedures, industry players will not only help prevent consumer debt from turning into a social liability, but also secure consumers' trust that will serve their long-term needs and objectives.
Consumer finance companies have a great opportunity now to do something good for their business, and at the same time contribute to the national and social agenda by helping educate individuals financially to help them build a better future.
The writer is the chief executive officer and president, GE Money Singapore and chief marketing officer, GE Money Asia
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