Source from (The Malay Mail): http://www.mmail.com.my/story/stricter-car-loan-rules-stay-despite-protests
Published: March 06, 2012
CAUTION: 'We don't borrowers entering into a loan
agreement and then find they cannot service their loan'
Q: Car dealers have come out to say that only one in three loans applications get approved and apparently new car sales have fallen by 25%. What's Bank Negara's response going to be? Are you going to backtrack on your measures?
A: No. You have to understand that Malaysia as a country has one of the highest car ownerships in the world. Per population, the number of cars owned is the highest in the world. So, our car market is already quite saturated.
Now, we have no objection if a borrower has the affordability to do so. What we don't want to happen is borrowers entering into a loan agreement and then find they cannot service their loan. The car is repossessed and it leads to a lot of problems for the borrower as well as for the financial institutions.
It is very important for the carmakers to recognise this – that there are limitations for the domestic market and it's very important for them to intensify their competitiveness and explore other markets in other parts of the world. There are a lot of noise that we continue to hear and we respond to. We engage with them, we tell them what we are doing and an important mandate of the central bank is safeguarding financial stability.
And what that essentially means is in the corporate sector, it is protection of shareholders' interests and so on. In the case of financial institutions, it is not just shareholder's interests but importantly, it is depositor's interests.
Our household debt to GDP (gross domestic product) is at a record high, almost 78% in 2011 and this is among the highest ratios in the region. How did our household debt become so bloated?
Household debt increases with rising incomes and what we have seen so far is that these loans have contributed to the growth of our economy and the important aspect of it is that the risk of loans turning bad is very, very low and is on a declining trend.
So, despite increases in the volume of lending to the household, the number of debts going bad have declined to now at 1.9% and that is low, less than 2%. In fact, the previous year, 2010, it was at 2.5%. So this is a positve trend.
The central bank has taken some measures to tighten credit, credit card loans and also for home mortgages and also now car loans. So are you worried that 78% may be just too high now?
No. At this point in time, we are not concerned but we don't want to wait until it becomes a problem and then implement (corrective) policies. Our policies are implemented across the board, a wide-ranging set of policies, the first starting with the normalisation of our interest rates. We raised it gradually from 2% to 3% in 2010. This is important and we said it was not a tightening but a normalisation of interest rates. This was to prevent the build-up of financial imbalances.
When interest rates are too low for too long, it results in mispricing of risk and formation of asset bubbles. People take an outlook that interest rates are going to be low for a long time and they may go into businesses that are less viable. At the moment, risk of recession was not there. And so, we took the opportunity to normalise interest rates. We also raised the statutory reserve requirement, which was at 1% to 4% to manage excess liquidity.
We also did sterilisation of operations, which means that we mopped up the excess liquidity largely as a result of inflows. We also implemented macro-prudential measures, which are like the loan-to-value ratio and other prudential regulations.
The government reinforced these with a capital gains tax. Why do we introduce all these? We don't want the formation of an asset bubble because it's a risk not only to the financial system but the economy. But also it prevents affordability to the public at large to purchase houses. We don't want to see speculative activity where easy access to loans at low cost encourages lending, encourages purchase for speculative activity in the property sector for example.
So these measures are essentially pre-emptive. We're not worried because it hasn't happened yet. But it could happen and therefore these are (preventive) measures. On the other side, we not only have these lending guidelines to have responsible lending practices by the financial institutions.
We have significant education programmes which have been introduced throughout the country and the latest one is called "Power". We believe it is important to teach especially first-time borrowers, who could be young members of our population from ages 20 to 30.
Economists are saying that perhaps there's a shift from credit card balances to personal loans, because of the credit card-tightening measures. Is Bank Negara going to home in on unsecured lending now?
We don't approach it by looking at these various segments. Equally important is the supervisory oversight because there may be one or two banks that engage in this kind of excessive business. They will be told, not only their management but their board, on the practices being adopted by the bank. If it is excessive and imprudent behaviour, we then take action on the bank and they may be required to come up with a plan, letter of undertaking on how they are going to address this issue.
Every other week, I probably get a call from a bank to ask whether I want a personal loan. It is very easy now, they just send to you a cheque and you can then just bank it and borrow the money. It becomes so easy, so accessible. Will Bank Negara take more active measures to stop these kinds of practices?
We don't micro-manage and we have general rules. It's based on principles rather than being very prescriptive.
What about lending to government servants? We're just looked at earnings reports of some banks that have excess lending to civil servants and they've been reporting like 50% growth. From an outsider's point of view, it seems quite worrying. It would seem to suggest that civil servants are borrowing indiscriminately. Is Bank Negara monitoring this closely?
Civil servants also may be borrowing but less through the banking system. Some of them, especially the middle-to-lower income groups, may be borrowing through cooperatives. We have highlighted and engaged with the Cooperative Commission that people should be allowed to borrow if they have the means. That means based on affordability.
While we put that in place in the financial system, with financial institutions under the purview of the central bank, it could case of migration and gravitation to the less regulated parts of the financial system. This has been observed in Europe and even in the US. They call it shadow-banking and so on.
That hasn't happened yet in our country. But once again, we don't want to wait until it has happened and then rush to put in more stringent rules than what was required. Now, it is a gradual process. When we recognise a trend, we highlight these to the various regulators, the government and so on. We wish to heighten their surveillance on these borrowings before it becomes excess.
The subsequent parts of this BFM interview transcript will be run over the next few days
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