Industry Insights [Webinar Recap] Ethical Lending & Collection During Covid-19 10 Nov 2020 • 19 min read For Flow's inaugural webinar, we had a very illuminating panel discussion on lending and collection trends, regulatory guidance, and challenges the pandemic brings, among other topics. Stay tuned for more of such insightful webinars coming your way. We hope that with these interactions, Flow is one step towards our aim of creating a better and a more ethical debt collection ecosystem in Asia.Arun Pai: Let’s get started with the first question. Given the kind of destruction we have seen COVID-19 has caused, both on the personal front as well as the economic front, what are your observations on lending trends and consumer finance behavior specifically given the recent lockdowns that governments across the globe have implemented in their respective countries to try and limit the spread of COVID?Dr. Jos Luhukay: Compared to the previous financial crisis in 2007, this crisis is caused by a lockdown. A lockdown means that transactions undergo steep decline. The issues are with the self-employed people in the country that is hit badly. Even the employed consumers are getting hit quite badly also. On the lender side, the collection issue gets in their priority list.On the consumer lending aspect, the impact is big. I get SMS messages offering from sources unknown to help settle my credit account. I get at least five to six such offerings per day. When I check with my friends, they got the same. However, with the smaller borrowers, we have to restructure that or they will not be able to bring anything home to feed their families. Compared to the restructuring strategy back in 2000 and 2008, this is reverse so we have to go in reverse. We start with the consumers first and then go back until we hit the corporate. Corporation is more self-sustainable. They have more instruments to help bail them out of the crisis but not the consumersEthical lending and collection means we are bridging the communication between the borrowers and lenders. Dr. Agus TjandraArun Pai: Interesting. Dr. Agus, I would love to get your insight over here. Are you seeing the same thing on the ethic side of lenders?Dr. Agus Tjandra: Yeah almost. In the case of FinTech, it is due to the banks regulations being more relaxed. Ethical lending and collection means we are bridging the communication between the borrowers and lenders. We can allow more easing, but what kind of easing and to what extent? We can have them to restructure their period of may be longer and interest can be lower and administration we can avoid. Right now, similar to banks, we allow ease of returning debts and make lenders more responsible for their actions, and approve borrowers on a case by case basis. Arun Pai: Edwin, coming from decades of collection experience, where do you see the COVID-19 pandemic lined up across all of this from the collections side of things?We cannot do collection like in the old days anymore. We have to be smarter and implement technology in how we prioritise our collection. Edwin BrethoniereEdwin Brethoniere: For the past six or seven months, we were very busy in entertaining our customer for doing this restructuring program. They are asking for holiday payment, asking for grace period for six months and it is good that OJK has issued the BOJK number 11 if I am not mistaken and only yesterday or two days ago they extended the program. It should be March next year so the legal extended for another year.As far as the currency is concerned, we cannot do the collection like in the old days any more. We have to be smarter and implement technology in how we prioritise our collection. We cannot call everybody right now, we cannot chase everyone, if you look at the unemployment rate in Indonesia, it is going up steep. I think latest data during this pandemic, 3.7 million employee have lost their job. Year-on-year-growth in the economic growth is also minus -5.3%.Total loans for half of 100 banks in Indonesia reaching 5,400 trillion whereby 900 trillion of debt has been under restructure. So if you at the impact, or the overall impact of economy right. If only we are not doing the restructuring for them the MPR rate goes over 5% now. I think for Indonesia we are at 3 to 2% right now.Doing collection as far as the ethical lending is concerned, I think like Dr. Jos has mentioned before, we need to leverage internal technology, the artificial intelligence on how we can prioritise the calling. The question is how we can measure the character of each customer especially on customer lending. Of course we can look at their credit history, but if it turns up to be the loan has been with us for six years seven years and never been goes into NPL, that’s probably something we need to help in giving them the hands up, extend the loan or giving them the grace period for six months.Impact Investing Amid COVID-19Arun Pai: Thank you Edwin. Ben, I will just amend the question a little bit given your investing background. You just heard some pretty scary statistics from the other three panelists about how precarious the situation is. I also remember you mentioning during the introduction that you are an impact investor. Do you find the whole impact investing aspect now, comes even more in the full front of what you are doing on the back of all this COVID-19 pandemic?Ben J Benjamin: Yes it’s a good question. First, we look out for companies that are very well funded in the venture of that space. Funded and having strong equity position is a key part of what we do. I will tell you that during the COVID-19 pandemic, we have managed to find pipelines of such companies that are actually bigger than pre-Covid. You know I think COVID had this effect of taking out the guesswork in which of this really strong tech companies that are starting up and which of the companies had perhaps weaker business models. Those companies that have stronger models can raise cash and can continue to raise cash through this pandemic and will continue to grow. So I think from a lending perspective to tech companies that are growing well, we see a huge opportunity in South East Asia on the lending side.Now on the impact side, impact has been something very important to my partners and I since we started the fund. A lot of people are looking at their investments not just in tech of Indonesia, but in other countries and verticals and they are looking for some level for meaningful return. It is no longer just about profits. They want to see how their investments are impacting people and communities, the future progress we see idealism seeping into language of our world and I think that’s going to continue through and because of COVID.Government Response To PandemicArun Pai: Perfect. During the COVID pandemic, we see government support play a very vital role in ensuring that the economy can be propped up. Edwin, to begin with this topic, because as on the collection side of being in a very large bank, how do you see government support helping you out trying to connect with the borrowers better to ensure collection can still be done during this pandemic?Edwin Brethoniere: As I have mentioned before, the OJK has issued the international regulation for us. There are 11 industrials that have been mentioned that predicted to be badly hit, aviation and hospitality industries especially. So the policy that has been issued states that we cannot able to be proactive as a bank to reach out to our borrowers. The government left the relaxation program itself to the bank but the umbrella was issued by them, so banks handle their internal assessment. We can do some restructuring for all those impacting the borrowers. OJK did also mention that to avoid moral hazard, banks need to be cautious and to know their customers even better nowadays.To the borrowers, it is matter for life and death, but not to the lenders. So take off the penalties one. Number two, take off the interest accrued then you get to the principle, stay tough on the principle. Dr. Jos LuhukayArun Pai: Dr. Jos, sorry to put you on the spot, but do you feel the Indonesian government and OJKA have done enough during this pandemic?Dr. Jos Luhukay: In a way, yes. Now it remains to be basically the way the banks and the lenders are taking positions on this. I would like to remind the lenders to what I call collection 101, you need to be able to segregate the principle amount from the interest accrued and the penalty. Strip off the penalty first because, hey, the lenders are being hit less than the borrowers in a way.To the borrowers, it is matter for life and death, but not to the lenders. So take off the penalties one. Number two take off the interest accrued then you get to the principle, stay tough on the principle. After you strip it off, then you get to an amount that can be discussed with the borrowers. So that is what I call collection 101.If the lenders will stay at the position to collect everything, forget it. It is very difficult especially in unsecured consumer lending. Even in corporate lending what we did back in 2000 to 2004 was to strip it off and get back to the principle. No forgiveness in the principle except for the lengthening of the tenure that’s the only way out or basically reducing the interest going forward. Arun Pai: Dr. Agus, being a top figure in AFPI, where do you see AFPI trying to help? It has done a phenomenon job since the inception of the association, where do you see AFPI trying to assist Fintech lenders during a COVID pandemic time like this?Dr. Agus Tjandra: AFPI aims to bridge a gap. We educate companies to show more empathy to the borrowers. We deliver measures from OJK to our members, we have 155 members and we educate them, get them to listen to what’s going on in the field. Then we report this back to OJK. As Dr. Jos mentioned, OJK leaves it to AFPI because the fund is come from the lenders so we have to discuss with the lenders.OJK is firm that we have to put empathy first to the borrowers, to provide reasonable measures to them. We ease the regulations as mentioned before. We communicate to the companies and then they try to modify the risk mitigation since there is some slight change of the behavior during this new pandemic. Work from home, selling products from home, every industry is from home and we start to monitor the borrowers' behaviors, so we can change the mitigation risk to the AI system to solve this problem and to move forward.Staying Ethical Amid PandemicArun Pai: Moving right along. Most of you panelists were mentioning how this crisis is quite different from the ones in the past. This Covid pandemic is different from, be it the Asian Financial crisis, be it the global financial crisis over the last 10 or 15 years.The question I would like to ask is, given the nature of this pandemic, is it even more important to be ethical, during this extremely difficult time that has a very personal flavor to it? May be I can start off with you Dr. Jos because you are the most experienced and have gone through all this crises. How do you feel that the financial sector be it on the lending side or on the collection side should react to this?Dr. Jos Luhukay: I would like to start by sharing what is prevalent in the medical industry. Doctors are trained that if they are asked by a patient whether he or she should have a surgery on a particular problem, very often, I can tell you that no ethical doctor would suggest to do surgery on you unless absolutely necessary. Likewise, I would like to see and I have always told my people on the lending side that no ethical banker would give you a loan to mitigate issues like this. When faced with a borrower who is an outlier, they would inform the borrower, “yours is a difficult case, would you be able to pay more interest on a shorter period?" No ethical banker would give you the loans. I have never had that.In two or three occasions in the banks that I led, I’ve heard my people say that and the customers come to me and ask, sir do you know that your banker said this to me? My team was speaking out of empathy to them, rather than letting the borrowers go into a problem later on, knowing as a banker, he or she already knew that the borrower will run into problems. Hence, this is what I call ethical lending.On the ethical lending issue during my time as a chairman of the taskforce I was approached by a big conglomerate. When I asked him, how come you have borrowed money from 121 lenders all over the world? He brazenly said to me, the bankers made me do it. So bankers need to know that, don’t push it because most often it would become a problem. The lenders need to know who they are lending to and whether they are going to ultimately repay and if they are in difficult situations or outliers from the beginning. We should understand there is a lot of inherent risk especially in moments like COVID. Ben J BenjaminArun Pai: Ben where do you see from the investing side of things? Do you feel the need to set certain guidelines to ensure this ethical aspects continues especially as an impact investor?Ben J Benjamin: Let me approach it more from a lending perspective because that is effectively what we do. We lend to companies, hence we have a strong corporate lending mechanism. We don’t really lend to consumers.I think from that perspective absolutely and I think Dr. Jos hit right on the nail. First of all, the lenders need to know who they are lending to and whether they are going to ultimately repay and if they are in difficult situations or outliers from the beginning. We should understand there is a lot of inherent risk especially in moments like COVID where leveraging up or making a little more of this particular cases is not the right thing to do. I think that is a really key message. When we started out the company (Flow), and we aim to treat borrowers ethically, we realised very soon on in the game that if you’re working or partnering with financial institutions on the lending side that are not ethical in nature, regardless of what you do to borrowers, they would always be caught in this debt trap as a loan shark and that’s an extreme aspect of it. Arun PaiIn terms of setting guidelines actually, I stand by lenders guiding criteria. Flow has set up a very interesting table where you look at responsible lenders and you have an assessment that goes to traffic lights system and you look at transparency, pricing, far pricing, terms and conditions exposure early repayments options, data privacy and design of the whole process. When I look at that with you guys a few months ago. We thought wow this is a really interesting way, not just to select investments but to educate lenders and how far one can go to make sure you are upping your game in this respect and making sure you are an ethical lender. So I do think we have a responsibility and we should certainly be playing role in this respect.Arun Pai: You know, it is a very interesting point that you brought up when we started out the company and the whole idea was we had to treat borrowers ethically. We realised very soon on in the game that if you’re working or partnering with financial institutions on the lending side that are not ethical in nature, regardless of what you do to borrowers, they would always be caught in this debt trap as a loan shark and that’s an extreme aspect of it.Edwin, where do you see the aspect of ethical collections and how do you implement that in the large bank and maybe the in the large bank you work for?Edwin Brethoniere: I think ethical collection is a very important aspect as far as collection is concerned. We have never been in situation like this before, even previous crisis was not like this. Nowadays, there is COVID restrictions everywhere.I am looking at the reputational risks that might happen to the bank. So assuming consumers took a housing loan and the housing loan becomes delinquent, non-performing loan. If we don’t know our customer, we don’t know what problem they are facing on, we probably as simple as putting their asset into the auction. Without knowing who they are. From that angle I think bank also expose into risks this customer might file a complaint onto OJK or supervisory.From the lenders side and borrower’s side we need to work together with more open communication on how can we help them better so they can also help us in coming out of this situation nicely and safely.Ethical Lending ProspectsArun Pai: Dr. Agus, what would be your take on being part of AFPI overseeing the FinTech funding ecosystem along comes COVID massive pandemic affecting all the individual borrowers? Where do you see the aspect of ethical lending or collection coming to your ecosystem?Dr Agus Tjandra: During this crisis, all industries start from the bottom to the top is attacked by this pandemic. Fortunately the impact to Fintechs are not as severe as compared to impacts banks face. Hence, we can modify our risk mitigation and change our artificial intelligence models. At the moment, we are more strict. In AFPI, we get our information from the company then we get the complaints or the situation and behavior, and we access the different situations together and report to OJK. I think a lot is positive as long as the company or the borrower or the company to give little bit discount of the rate and duration longer and relaxation is softer.Covid-19 Short to Medium Term ImpactArun Pai: Excellent. Thank you very much. I hate to kind start bringing this conference to a close. Before that, I would like to ask around the panelist if they could peer into their crystal ball, what would you think, be it the short term or the longer term impact of COVID, will be for your respective industry or division that you are part of and any closing words that you might have?Ben J Benjamin: If only we could be able to see this kind of impacts. I think we are in for a period of hardship. I think that’s been clearly documented. We are clearly seeing how the second third fourth waves of infections are happening around the world. New lockdowns will result in new issues so I think we are in for short term to medium term pain. However, as with every single economic or health crisis the world has been faced with, the human race bounces back and innovation continues and investment continues and we continue to grow.I absolutely have no doubt this will be the case this time and really we are looking for those companies that have strong business models and that have a strong impact objective as well and we are looking to back entrepreneurs and their teams that can make a difference in society in Southeast Asia.Dr. Agus and Dr. Jos both mentioned separate communications and Edwin as well. I think communication in this time between lender and borrower is perhaps one of the most critical things both sides can ask for. Because when things get tough you just want to withdraw, you don’t want to talk, you don’t want be faced with ethical questions, you don’t have given wrong answers for sure, but that is something really that borrowers and lenders should think about.As bankers, we forgot to tell our consumers of how to manage wealth. We thought that they would take care they could. How could they? Because in the first place they squandered probably all their revenues and income! In more than one cases, there were unsecured lending in which the borrowers would buy a refrigerator when his house does not even have electricity. So how can we correct this? Dr. Jos LuhukayDr. Jos Luhukay: The toughest part of collection is to cater for unsecured loans. So one of the things that I learnt being banker for so many decades is that as bankers we concentrated on lending which is basically dolling out notes. One thing that came out of two countrywide nationwide surveys as bases for doctorate research that I have been involved in was that as bankers we forgot to tell our consumers of how to manage wealth. We thought that they would take care they could. How could they? Because in the first place they squandered probably all their revenues and income!In more than one cases, there were unsecured lending in which the borrowers would buy refrigerator where as his house does not even have electricity. So how can we correct this? This misfit between the lending industry and the borrowers especially the Lower CLD class is so wide. The issue is how we can help education of the borrowers because that is the point of pain. They need to be educated because they need to be able to process excess cash, excess funds into something that can be better than savings simple savings that can only probably give out 3 to 4% in interest or even less so that is the other side. If we go into that and look into that and start giving out solutions for the consumer market then we may get the whole cycle completed. Arun Pai: Dr. Argus, do you feel that’s one of the roles AFPI within one of its ecosystem can play and your final words also please?Dr. Agus Tjandra: Our members have some instructions from OJK that we have to concentrate to the product especially to SME. Because SME is almost 97% of the economy for Indonesia. So this is quite the safe to the players and between the borrowers and lenders going forward. Integrating between banks and fintech to disburse the fund and then we have artificial intelligence, this is important to solve so much more of the problems in the new future. Edwin Brethoniere: During the pandemic, hundreds of branches have closed so during that period of time, we expanded our digitalization banking for customer to be able to do a transaction not going to the bank but they can do it themselves through internet banking, through the mobile banking and all that wherever they are. This is something that we can move up right now. I think 30 to 40% of those activities can be done through digitization. As a bank we need to survive, we cannot do things that we did previously.Alternate Credit ScoringArun Pai: Excellent. I would like to get to some questions that the audience has asked. The first question is, can we do better credit scoring based on alternate data for consumers as reversed strategy that Dr. Jos mentioned? Dr. Jos Luhukay: It should be. I have been trying to get the first Indonesia privately owned credit bureau since 2010 and the data has to be sourced by a lenders and that is basically met with a lot of challenges regulatory and politically but not financing because it is very cheap to set it up.When we get that because a lot of the unsecured borrowers are first time borrower, and there is no data in the OJK or banking Indonesia credit bureau for that matter, so for unsecured lenders, the problem is giving out a loan and you just hope that it will not go bad so that is the first thing.Formula lending is okay, but formula lending needs data and with data you need to know also that the data is sourced not by the banks or the lenders but also by the telephone companies, by the drink water companies and others. This is a multi-industry. It is not just a financial industry effort. It has to be taken up by the private sector. When I started doing that back in 2010 2011, I was met with challenges mostly from the companies because the companies are so scared because the tax people will go after them if they open up. So it has to come from the lenders because if the lenders start to give data, then yes we can implement that but the other data, the supplementary data, should come from non-banks because this borrowers have not borrowed before so this is the first time borrower. Where do you get the data from? You get the data from telephone companies. Credit Bureaus are non-existent. Credit bureau in Indonesia is just basically history not for the first time borrower. So we don’t have the data to be able to implement the proper formula lending using the reverse approach. But if the P2P the Fintech companies can get basically organized and put together its own private bureau for consumer borrower’s that would be great. You know Dr. Argus I would like to volunteer for this if you ever want to do this. That is going to be very important thank you.Arun Pai: We have a question for Dr. Agus too. Do you and potentially does AFPI believe that there should be some kind of guidance to tell lenders to tolerate the whole recoveries during this pandemic times just for the sake of ethical collection and consumer oriented behaviorDr. Agus Tjandra: Yes we do. Actually we do some literation to the members and again the members back to the borrowers depending on the character of each member and each borrower. We give some guidelines based on the empathy and the morality to solve this problem. We give them more empathy and we are able to switch the technology to get good result and of course we are testing the data one by one.Back to Jos, yes! In AFPI, we have developed what we call ‘think tank data center’. We just developed it. We are happy to collaborate.Arun Pai: Fantastic. I will definitely connect the two of you guys after. We have a slightly more detailed question on collection which I will address back to you Edwin. What collection strategies or actions that assume ethical lending and collection approach do you believe is taking place right now as you mentioned during the course of the panel, you said that we cannot use old ways anymore. Can you give some example to some of the audience what is sample collection strategy that you can try use right now and maximize recoveries?Edwin Brethoniere: Right now, we have a collection system whereby you can slice and die collection by crediting and looking at credit history. For instance, you look to the credit history of this customer, and then you start using a leverage technology probably a system in absence of AI so that you can privatize better your calling strategy.We need to understand better. You need to know your customer even better nowadays. How you can do it, you can always look at the credit history, how long has this customer been with you.Arun Pai: Interesting. Last question Ben. We have seen the western world potentially not being able to handle the COVID pandemic as efficiently and well as countries including the one that we are sitting in right now Singapore and Asia in general. Do you feel more investment dollars will come to the Asian region if that is the case and that continues to be the case?Ben J Benjamin: Well I think that remains to be seen. First of all, I hope the 14 economies you have mentioned will continue to manage COVID as well as they have. But you know we have seen some falls down in the past, I hope that will not be the case. You know generally speaking I think investors follow where the money is perhaps more stable economies like the ones you have talked about where destruction is less.Yes perhaps the level of certainty will encourage additional investments. On the flipside you know it is also markets where there is significant disruption and market chaos and tension and there are a lot of companies that are falling-off and other companies have an opportunity to continue to grow that will call for different perhaps kind of investors. I guess it depends what kind of investor you are speaking to and what they really value. I think in times of crisis, we all know there are massive investment opportunities.Arun Pai: That is a great positive outlook to tray and end this conference. I am sure I speak for all listeners that were kind enough to attend this webinar that this was a truly fascinating and extremely educational discussion. Many thanks to the panelists for attending. We will be coming up with a number of other conferences in Vietnam and India, our other operating countries.A big thank you to all our speakers: Dr.Agus Tjandra from Asosiasi FinTech Pendanaan Bersama Indonesia (AFPI), Edwin Brethoniere from PT. Maybank Indonesia Finance Tbk., Ben J Benjamin from Genesis Alternative Ventures and Dr Jos Luhukay from Pinnacle Court Capital.Also to our Chief Sales & Strategy Officer, Arun Pai for moderating and our Co-founder, CEO Tomasz Borowski.