Why did investments drop so sharply in the aftermath of the Asian financial crisis?
The 1997/98 crisis was a huge shock that exacted a heavy psychological toll on all, including businesses, the government and central bank as well as the people. It left lingering scars on both the political and economic landscape of the country.
We witnessed increased risk aversion in banks as well as on the part of regulators, as evidenced by rigid guidelines on provisions, risk weightage, coverage ratios and foreign funding, among other things.
The ensuing banking-sector consolidation reduced the number of banks, leading to lesser diversity in terms of lending strategies and practices. All of the remaining big banks gravitated towards the safest segments — mortgage, hire-purchase loans, personal loans and credit cards. Business loans were mostly directed to large, well-established companies where the perceived risks were low.
In particular, the sharp rise in mortgages crowded out loans to other productive sectors. Residential property loans grew 12.4% annually since 1996, well outpacing the banking sector loan growth of 7.5% over the same period. The share of mortgages as a percentage of total banking loans tripled from 12% to 34% from 1996 to 2019.
This has yet to even take into account the overbuilding of commercial and retail properties. Vacant office space, shoplots and empty shopping malls are all low productive assets, the same as unsold and unoccupied homes.
On the other hand, micro and small and medium enterprises (SMEs) with little financial data and hard assets for collateral have limited funding options. The same goes for start-ups, thereby constricting entrepreneurship and innovation, and potentially robbing the economy of growth with the highest productivity.
To stimulate new and innovative investments, deeper structural changes to the current financial system are needed — beyond moral suasion for existing banks to lend. After all, banks are private entities looking out for their bottom lines.
How do we address the issue of funding and banks’ risk aversion? The simple answer is data.
Risk is a function of the unknown, the uncertainties. The less we know of a project or business, the higher the risks and the greater the reluctance to finance it. Therefore, the answer must logically be to reduce the unknown — by collecting massive amounts of data, public and private, and consolidating it within one digital platform, and through the use of supercomputing power, artificial intelligence and analytics, to transform the data into useful information. The more information, the lower the risks.
Availability and accessibility to information should, in turn, promote a more robust ecosystem and innovative lending, such as community crowdfunding. The ecosystem must include not just traditional banks but also digital banks and fintech companies. Of course, the government must facilitate this with the relevant regulations.
The tremendous growth of fintech companies such as Ant Financial (an associate company of Alibaba Group Holding) in China and Square in the US are proof of concept. These companies have very successfully cultivated and helped grow a generation of micro and small businesses by knowing their customers in ways that traditional banks cannot — through the amassing of massive amounts of data.
Data is the most powerful currency in the digital future. A robust shared data platform will not only transform the financial sector but also, we foresee, be the direct catalyst for changes across a broad swathe of industries.
