Guest Column
    Category: Column By : Administrator Read : 896 Date : Thursday, October 16, 2014 - 20:34:30

    During recent trips to Jakarta, I have noticed renewed interest from international brands in wooing the growing middle class to buy everything from clothing to cars. The mood has shifted from early 2013, when investors started to turn cold on Indonesia as growth fell to its lowest level in four years. Last year, Standard & Poor’s rated the credit outlook for the corporate sector in Indonesia as mostly stable for 2014 and the economy is forecast to expand by 6% this year. Against this growth, lending continues to rise—evidenced by new cars and motorbikes in the streets and the advertisements for loans in the newspapers. March sales figures from the Association of Indonesian Motorcycle Manufacturers showed motorcycle sales were up 9% over last year.

    As lending increases however, so does the risk of nonperforming loans. This is especially true in an environment where many are new to loans. Recently, Bank Indonesia reined in mortgage, credit card and motorcycle lending to temper the pitfalls of easy credit access; it could well clamp down further as the economy heats up.

    Beyond these measures, we need to pay attention to the fact that many Indonesian banks should continue to improve operational efficiencies, specifically the rural and community banks. Many are modernizing their risk assessment tools, computerizing backroom functions, rolling out new services and grappling with running a network over large distances. Lenders are under pressure to stay profitable as the economy and competition grows.

    One way to ensure sustainable growth and profit is credit scoring. Simply put, credit scores are a way to determine if a consumer can successfully repay a loan. It is a solution that has been in place for decades in the U.S., and which has been adopted by almost all OECD countries. Building an accurate scoring system is a way of standardizing the measure of creditworthiness. It allows banks and other financial institutions to improve the way they lend. Automation can speed the process and remove the human bias, enabling banks to improve customer service and reduce non-performing loans. These scores have a positive correlation with banking efficiency. Banks can effectively segment the lending market, provide more access to credit, and pinpoint the most suitable products for each segment.

    While many banks use custom models to score applicants, this process can be vastly improved by adding credit bureau scores, based on credit bureau data. These scores analyze all of a consumer’s credit history across multiple accounts, providing a robust prediction of future loan performance. These scores work better than other ways of analyzing credit because they consider all factors in combination— this means consumers are not unduly penalized for a single late payment for instance, since negative factors are balanced by positive ones. At the same time, this analysis can identify signs of trouble with consumers who have not yet made any late payments.
    Scoring helps to introduce automation and efficiency into the banking system. The result is a stronger financial system and one better able to support national growth. Ultimately, being able to lend the right amount to the right people with the right loan instruments will ensure continued long-term profitability for the banks, and aid sustainable economic growth by limiting debt risks.