New guidelines ensure borrowers do not abuse credit

KUALA LUMPUR: The responsible financing practices, which came into effect on Jan 1 and have caused some disquiet among housing developers and car distributors, were tenaciously upheld by the central bank as it came under criticism for using a one-size-fits-all approach in tackling rising household debt.

Source from (The Star Online): http://biz.thestar.com.my/news/story.asp?file=/2012/3/23/business/10971357&sec=business
Published: March 23, 2012

Bank Negara’s stance on the issue was reiterated at a forum jointly organised by the Malaysian Economic Association and Universiti Malaya’s Faculty of Economics and Administration to discuss the central bank’s annual report as well as the financial stability and payment systems report.

Household debt to gross domestic product (GDP) rose to an all-time high of 76.6% in 2011 after growing 75.8% in 2010 with an upward quarterly trend observed in central bank statistics since 2009 and only started stabilising from the second half of last year.

Borrowing, according to the data, continued to be concentrated in residential properties, and motor vehicles together accounted for 64% of total debt.

Assistant governor Dr Sukdhave Singh said in reply to a question from the floor that the lending guidelines and the limit to the amount of loans given for residential property purchases were put in place to ensure that borrowers did not abuse credit.

“We’ve seen rapid growth in household loans with banks giving credit to single borrowers of multiple properties, giving the impression that the purchases were for speculative purposes,” he said.

The guidelines on responsible financing, applicable to home and vehicle financing, credit and charge cards, personal financing including overdraft facility as well as financing for the purchase of securities, save for those which come under stock exchange rules, essentially make the vetting of potential borrowers more thorough with ability to borrow based on net income.

“How are the guidelines bad when they ensure that borrowers do not default at a later stage?” Sukdhave asked, adding that defaults in a large scale would not only impact certain industries but the entire economy.

He drew a comparison with the subprime crisis in the United States where borrowers defaulted in large numbers on their housing loans as they were not able to service them, especially when the interest rates rose.

“There’ll be a price to pay in the longer term should we allow this to happen,” Sukdhave pointed out.

Meanwhile, he said what uses the Government had put for the debt it had incurred were more important than the level of the debt. The Government has projected the deficit at 4.7% of GDP this year while national debt stood at 54.8% of GDP.

“It’s not the debt level we should be concerned about. It’s more about what the debt has been used for. In Malaysia’s case, as with any emerging economy, there is a need for infrastructure but there’s certainly room for improvement in how the Government spends money,” Sukdhave said.