Published Date: 14 November 2003

Keynote Speech by Mr John Palmer, Deputy Managing Director (Prudential Supervision), Monetary Authority of Singapore, at the Credit Bureau Conference 2003, 14 November 2003

"Data-Driven Strategies : A New Frontier" Introduction

Good morning, everyone.

I am delighted to see the wonderful turnout for this important event. This is a proud occasion - the first anniversary of the founding of the Credit Bureau of Singapore. Although MAS cannot claim to be one of the parents of the Credit Bureau, we are as proud as any parent might be. We were present at the conception, we were present at the birth, and without extending that metaphor any further, we certainly feel as proud and happy as all of you that the credit bureau has come into existence and has had a successful first year of operation.

Data-Driven Lending

The theme of this conference is "Data-Driven Strategies : A New Frontier", and what I really want to talk about is data-driven lending, higher profits, lower risks, and fairer treatment of consumers. The Singapore Credit Bureau came into this world at a rather difficult time. Singapore was experiencing an economic downturn; we saw rising unemployment, and shortly after the founding of the credit bureau, we had to struggle through the SARS difficulties. And while all this was taking place, and partly as a consequence of this, we saw growing levels of credit card debt and a growing number of defaults and bankruptcies. This environment has posed problems for all of us. Lenders have been faced with growing credit risks, many consumers have been faced with debt burdens they simply can't manage, and MAS has been experiencing some pressure to curb the practices that are thought to have been causing these sorts of problems. And yet, consumer credit is still a very attractive and growing business - you only have to walk through the shopping malls on weekends to see and feel the buzz of marketing activities, and to understand just how attractive consumer credit is to many lenders.

Should MAS be attempting to restrict the business in order to reduce the incidence of defaults, and the growth of credit card debt? Well, we already restrict credit card lending, we already have some restrictions on secured finance, and so the question is whether we should go further. Despite the concerns about rising debt and default levels, it is important to recognize that most consumers are able to manage their debt in a sensible manner, and we don't want the tail to wag the dog. It should also be noted that the economy is now doing better than during the time the credit bureau came into existence, although many of the concerns that have been developing over the past year still remain.

In my view, the essence of the solution does not really lie in more restrictions on unsecured lending or on the issuance of credit cards, and it does not lie in tightening credit generally. The solution does lie in better credit granting practices and risk management practices on the part of lenders. The key is to be able to market new or enhanced facilities to good credit risks, while restricting credit to poor credit risks. Simple in concept, a bit more difficult in application.

Foundation of better credit risk management

The foundation of better credit granting and risk management is better information. A key piece of information in this respect is updated aggregated data on consumer defaults and payment patterns. That is essential, and such information, if available, should be made use of. It should be reviewed routinely with each new credit application; it should be updated on a regular basis, as outstanding credits are managed. The use of such data in lenders' scoring models will improve lending decisions and enhance profitability. The poorest credit risks can be avoided, pricing can be adjusted according to risk, and exposures can be reduced when credit risk increases.

These practices on the part of lenders will actually benefit consumers. Those who need credit and are able to service their debts will receive the credit they need. Those who have difficulty servicing their debt will not receive additional credit, and will be encouraged to reduce their exposures on a timely basis.

With the establishment of the Credit Bureau of Singapore a year ago, the era of better data has arrived. We congratulate all of you - everyone who has been involved in this process - in the decision to design and create the Credit Bureau. We think that the Credit Bureau of Singapore will become part of the solution, not part of the problem.

But if the Credit Bureau is going to be part of the solution, it has to be used. We hope that all financial institutions involved in retail lending will make full use of the Credit Bureau and the information it can provide. We would note that the initial usage of the Bureau's data has been lower than originally projected, and we are hearing about different usage patterns amongst member institutions. So we urge all of you on the lending side to make full use of Credit Bureau data. You should not be making any retail credit decisions without it, and you should be updating the information and re-evaluating those decisions on an ongoing basis as part of a healthy credit risk management process. The cost of accessing data from the Bureau is relatively small. The cost of not using the data is much larger.

Just as you are or should be scoring your customers, MAS scores the credit risk management practices of the institutions it supervises. And as we evaluate your practices, we will be taking into account your use of data including Credit Bureau data. So if you don't use it, all other things being equal, your score from MAS will be lower.

Future enhancements and corporate credit bureau

The Bureau is off to a good start, but there is more to do. There is more customer information that could be collected and which might well be useful; which well might improve lending decisions. So I think all of you who are stakeholders of the bureau need to consider whether it should be collecting and aggregating other types of data.

What about corporate/commercial data? Information on credit histories is just as important to good commercial lending decisions as it is in retail lending. So should a commercial-type body be created to support commercial lending? At MAS, we are great believers in the importance of high quality data to support all business decisions. So we would encourage continuing enhancements of the Bureau's services and consideration of other models for ensuring that the best possible data is available to support lending decisions.

While our policy at MAS is to favour industry-sponsored or self-regulated structures, rather than putting in place government-owned or government-directed structures, we will remain keenly interested in the future development and enhancement of the Credit Bureau and any sister bureaus or additional activities that might be established to complement its work, and we will certainly do what we can to facilitate progress when our help is needed.

Privacy of consumers

While better data is the centerpiece of better lending and better consumer protection, there are other related issues which must be addressed. One important issue is privacy. When the Credit Bureau opened, concerns were expressed that customer data might be misused. We are satisfied that appropriate safeguards have been put in place, but this is an issue which is going to require continuing vigilance. If there are concerns that confidential data is being misused, or is leaking beyond the Credit Bureau family, the credibility of the Bureau will be undermined. So it is important that we all work to prevent that from occurring.

Data Accuracy

A related issue is data accuracy. In other countries, one of the big criticisms of consumer credit bureaus is that sometimes the data is not accurate, and complaints from consumers about inaccurate data seem to be particularly attractive to journalists. In Singapore, we are satisfied that appropriate safeguards are in place to ensure that accurate data is submitted, and that where errors do come to light, they are corrected on a timely basis, but this is another area in which we are all going to have to remain vigilant to ensure that the data quality remains high.

A sense of responsibility

A final, and more general issue is the need for a sense of responsibility on the part of the lenders. We want to see lenders taking advantage of all legitimate opportunities in the marketplace, so we don't object to enthusiastic marketing practices if the marketing is focused in the right direction. But lenders must exercise care. Marketing efforts should be targeted to particular groups and should be appropriate to their debt servicing capacities. Broad-based marketing to people who can't afford the initial credit should be avoided whenever possible. Thought should be also given to health warnings in marketing materials to remind people of the need to be careful about their borrowing decisions.

Importance of consumer education

This leads to another important dimension of the opportunities and problems presented by unsecured lending. This is consumer education. Some consumers here in Singapore, and in other countries, don't have the skills and knowledge to manage their finances effectively. They are particularly vulnerable to aggressive marketing practices. To help consumers help themselves, MAS, working with industry associations like the ABS and individual financial institutions, has embarked on an ambitious, long-term education campaign to help consumers make better financial decisions. The program - and you may have read about it - is called "MoneySense".

We encourage all of you to work with us and with ABS to create booklets and other forms of information for the public to alert them to the potential opportunities and pitfalls in this increasingly sophisticated financial world. This will undoubtedly benefit consumers and will also enhance the reputation of the financial system and the individual institutions that participate in the programme.

Concluding Remarks

In closing, we at MAS applaud the decision to create the Credit Bureau of Singapore a year ago, and we congratulate all of you involved on the good work that has been done to bring the Bureau into existence and to make it operational. We are confident that the Bureau will become an important part of Singapore's financial fabric, with benefits to lenders and consumers alike.