Checking the fall into debt trap

By A. Jalil Hamid  | jalil@nstp.com.my

TIGHTENING CREDIT: Bank Negara’s measures to better manage household debts are timely

LURED by the availability of super-easy loans from banks, cooperatives and other lenders, many Malaysians are racking up excessive household debts that they can’t manage.

Many are carrying multiple credit cards while servicing one or more car loans, a home loan and even a personal loan. As such, they are struggling to meet the monthly repayment obligations.

Cumulatively, such household debts have pushed Malaysia’s household debt-to-gross domestic product (GDP) ratio to a record 83 per cent, the highest in emerging Asia.

The central bank said last week household debt at the macro level was not alarming yet but with the current internal risks to growth, it could pose a huge concern to the affordability and sustainability of the household sector. This basically means that Malaysia is facing the risk of a credit bubble, which is looming in other Asian economies such as China, Taiwan, Singapore and Thailand, economists say.

There could be havoc if the bubble bursts when households default on their home and other loans, leading to a situation almost similar to the United States sub-prime crisis in 2008. Our banks could also add more non-performing loans to their books.

Friday’s announcement by Bank Negara Malaysia outlining fresh measures to better manage household debts is timely indeed.

The credit tightening should serve as a good pre-emptive move to prevent deterioration in the debt ratio and tighten borrowers’ financial discipline.

Bank Negara governor Tan Sri Zeti Akhtar Aziz, in announcing the measures, said as of March, the ratio of household debt to GDP in Malaysia grew to 83 per cent from 70 per cent in 2009.

“Given that the economy is now growing in the range of four to six per cent, we believe this level of debt (ratio) is not sustainable and that is why we are introducing these measures.”

Effective yesterday, home loans will be capped at 35 years and personal loans at 10 years. Previously, the maximum tenures ran for as long as 45 years and 25 years respectively.

In addition, new borrowers can only take on debt amounting to 60 per cent of their monthly take-home pay.

To prevent leakages, the new ruling would apply to all the 33 banks and close to 500 cooperatives, which provide loans to their members.

This move is laudable. Cooperatives have been the dark pools within the country’s financial system.

Cooperatives that lend money to their so-called members are not regulated by Bank Negara. So, borrowers with less credit-worthiness and not qualified for bank loans would turn to cooperatives.

Cooperatives should be more stringent in approving loan applications. Banks and cooperatives should also start exchanging the credit history of their borrowers to ensure they are not overexposed or overstretched.

There are endless sob stories on how people are falling into the debt trap after they cranked up credit card bills or borrowed money from banks, cooperatives or Ah Long.

The government should also crack down on the menace of illegal money lenders.

Many businesses or individuals are forced to turn to illegal money lenders as banks refuse to lend to them, regarding them as too risky. They are shunned by banks either because they have poor credit histories or unstable incomes.

But the catch in such borrowings are the sky-high interest rates. Illegal money lenders are often accused of preying on the vulnerable, who end up in inescapable cycles of debt.

But we can’t ignore the plight of deserving businessmen.

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