Debt relief 'helps poor avoid bad decisions'

This post came out from The Straits Times (22 April 2016)

Clearing the debts of the poor reduces their anxiety and helps them focus better, possibly reducing the chances that they will make bad decisions which keep them mired in poverty. This was a key finding of the first local study on how debt affects the poor, which was presented at a conference yesterday.

But before help groups rush to offer debt-relief schemes, researchers were quick to warn that their findings also showed giving the poor a fresh start made them less risk averse in the short term. This suggests that they may do things such as buy lottery tickets, and inadvertently slip back into more debt.

This key study is believed to be the first local survey that establishes debt as a cause of poverty rather than just a consequence. Research overseas has shown that poverty taxes the brain to such an extent that the poor are susceptible to making bad decisions.

"Many low income households in Singapore have chronic debt burdens and consistently struggle to make required payments on time and in full. However, little is known about how debt affects them," said Dr Walter Theseira, a senior lecturer at SIM University who was one of the researchers involved in the study.

Before receiving debt relief, 76 per cent of the 246 beneficaries from Methodist Welfare Services' one-off debt relief scheme (Getting Out of Debt programme) surveyed showed signs of anxiety. This figure was reduced to 49 per cent, three months after debts were repaid.

But it seems that being relieved of debt does not mean people are more cautious in their financial decisions - 47 per cent of those surveyed were found to be more risk-seeking after debt relief. "It could be that they're more optimistic in the short term. Their debts are cleared, they want to improve their situation, so they go for riskier options with short term gains" said Dr Ong Qi yan, another of the study's researchers. Some of them could go on to buy lottery tickets, or try for odd jobs which do not offer Central Provident Fund contributions, thus having short term gains but no sustained job security. More research has to be done to see if debt relief does more good than harm, added Dr Ong.

Thoughts anyone?

Yours,

Something Small Thinking Big