Thinking out of the debt box

Proposals to rein in high interest rates and excessive personal borrowing have predictably drawn the ire of licensed moneylenders, some of whom have levied rates of up to 500 per cent a year should a debtor default, according to Credit Counselling Singapore (CCS). Business viability is a big concern, as noted by an advisory committee initiated by the Law Ministry to review the industry. But what ought to loom larger than a profit calculus are the social implications of the long-standing debt trap.

The ambiguity of attitudes towards debtors contributes to the roiling debate over regulatory measures deemed necessary here. Borrowing irresponsibly from illegal sources ought to be criminalised, argue those, including Members of Parliament, who point to social ills like the harassment of the innocent by loan sharks. Yet profligate spending by credit card holders or reckless behaviour by financial wheeler-dealers is not seen in the same light. To the cynical, it all turns on a poor-rich distinction. Accentuating the divide is the higher debt burden of low-net-worth people relative to assets, and the lingering grip of debt. If one owes a few thousand, the problem is entirely that of the borrower. But if one owes millions, the problem belongs to someone else, as John Maynard Keynes noted.

What's needed is a deeper examination of the social aspects of debt and how it affects different groups, given the changing demographic landscape. It is acknowledged in mature economies that people get into significant debt at different stages of their lives. Gambling is an oft-cited bogey but it ranks below other debt triggers like splurging on consumption and dealing with joblessness or pay cuts. Other reasons include borrowing for one's business and coping with big medical bills. As a result, tens of thousands shoulder debts of more than a year's income.

Beyond the chronic poor, there is a range of people who are weighed down by debts from time to time - for example, young couples setting up home, single parents, women coping with divorce, and ex-offenders and their families. Debt in itself is not necessarily bad as it enables people to tide over difficult patches when spending for pressing needs exceeds available income, or to make sound, long-term purchases, like a home. But debt management can often be sub-optimal. Hence the need for financial education aimed at different groups. Also useful are measures like CCS' proposed centralised repayment solution to facilitate a debt reduction plan that involves all of a borrower's creditor banks. Rather than just squeezing debtors, more can be gained by allowing flexibility for repayment, waiving levies for errors, and offering advice in crisis situations.