By Samantha Joseph
In the third part of our series, KiniBiz looks at how Malaysians fall into the trap of overextending themselves when it comes to personal loans and credit cards. Should the bulk of the responsibility fall to the consumer to make the right decisions, or should financial institutions, especially non-bank financial institutions, start taking stronger prudent measures when lending? Where will people turn if they are unable to get quick loans?
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Taking out loans for personal use takes up 16.8% of financing for the household sector, while credit cards take a 4.2% share. While it may look less impressive than the over 50% for property financing, it is still a great concern.
Housing loans take up a great percentage of financing because the sums involved are far larger than those of personal loans; personal loans and credit cards, by mere fact of their smallness, make it easier to be mired in.
A quick skim through local forums discussing personal debt will reveal evidence enough for that statement: a young executive with an income of less than RM2,500 already has personal loans of RM60,000 as well as car payments to deal with that is in several months of arrears. Someone else has personal and credit card debt amounting to RM47,000, and another who fell several tax brackets to finding himself unable to cover the repayments on his RM77,000 in personal loan and credit card debt.
As with property loans a longer term would give an impression of loans being cheaper. Taking out several small loans, the repayments of which are stretched over 25 years, would, in the short term, seem bearable.
Even skipping a few months won’t feel like a big deal if they amount to a few hundred every month – you’ll pay it back later. What usually happens, though, is that these debts pick each other up and end up rolling together like a giant tumbleweed of unchecked monthly repayments that stay on your credit record until they are paid in full.
Basically, personal loans and credit cards are like the Hotel California of debt: You can check-out any time you like, but you can never leave.
There is an intrinsic connection between credit cards and personal loans, as, in a sense, they can be considered non-essential in nature, and consumers treat them more cavalierly than they would a loan associated with a tangible product like a housing loan or a car loan.
As RAM Holdings’ group chief economist, Yeah Kim Leng said: “You already have auto loans, you already have housing loans, so that should be enough to fulfil the needs of the major borrowing requirements.”
BNM’s regulatory measures
In light of Bank Negara Malaysia’s measures to reduce the maximum tenure for personal loans from 25 years to ten years, AmBank group chief economist Anthony Dass believes that it is important for the authorities to limit the loan period: “The reason being that we found individual exposure to credit cards is much higher than personal loans based on loans disbursed, around 40.8% higher.
Hence, should there be a pick-up in potential defaults from the personal loans, it is likely to snowball into credit cards and eventually into other household segments.”
Yeah agrees “I think that it is desirable to reduce the debt servicing burden for personal consumption purposes. If you make it too long, you make it too easy for people to become more indebted, especially for activities that are not really considered productive, like loans for travel and weddings.”
There has also been a moratorium on pre-approved loans – pre-approved personal financing products like unsolicited loans and credit card offers. Malaysians would be familiar with the appearance of loan offers in the mail, or young salespersons practically pushing credit cards into the hands of likely-looking victims as they come down escalators or enjoy a cup of teh tarik ais at the tables outside a mamak.
These products make access to borrowings even easier, as the bank and the product come right to you instead of the other way around.
The ban, said Bank Negara Malaysia, “will further reinforce and strengthen the responsible lending practices among the financial service providers. For customers, the prohibition acts as a safeguard to avoid consumers being encouraged into taking up unnecessary borrowings.”
As Yeah stated plainly: “This is needed so that people don’t abuse it just to have access to these cheap loans.”
How and whom will it affect?
Those most affected by the ruling on personal loans would be those from the middle income as well as lower income bracket. Economists and BNM are hoping that these regulations will make people think twice about taking on personal loans or overspending on their credit cards.
“That will add pressure to the individual’s disposable income as we need to take into consideration the rising living costs, unless the potential upwards salary adjustment is able to compensate for any erosion in the real disposable income.”
As mentioned in the previous article, the latter is an unlikely outcome.
Non-Banking Financial Institutions (NBFIs), at 58%, provide a significant share of personal financing to households. Thus far, Angkasa, the umbrella organisation for cooperatives, has spoken out on the negative backlash it would face due to this new regulation, and the Malaysia Building Society (MBSB) recorded a share fall of 4% after the BNM measures were announced.
But like everyone who isn’t in that particular situation likes to say, no pain no gain.
One of the concerns of this clampdown is that borrowers will then migrate to money lenders that are not under the purview of Bank Negara Malaysia to get their quick money.
While Yeah does not think this is too likely, he does admit that it is something that has to be looked at on a case-by-case basis.
This would come as no surprise to Dass, as individuals are already seeking alternative financing at this point in time. He admitted that this could result in a pick-up in alternative financing, especially from money lenders who operate without a license.
Better financial awareness the answer?
Mohamad Khalil Jamaldin, head of the Corporate Communications Department for AKPK (Credit Counselling and Debt Management Agency), lamented the fact that in a lot of cases where people are in over their head with debt from personal financing are in that position mainly due to lifestyle choices. They are then unable to handle the repayments that result from their choices.
He paints a scenario for those who pay only a monthly minimum amount on their credit card debt: “Let’s say you take out a loan of RM10,000 on your credit card, and the interest rate is 17.5% per annum. If you only pay the 5% minimum each month, it will take you about seven years and three months to pay off the full amount.”
Khalil calls for a turnaround in people’s attitude towards their personal finances. Blaming banks for making it too easy to access loans and credit cards is simply a cop out. “Let’s be mindful of the fact that they [the banks] are fulfilling a need. The onus is on the individual to make the choice whether they want to take on the responsibility of a loan or not.”
Unfortunately, individuals often do not have the proper information to make an informed choice. The lack of education when it comes to personal finance ensures that people continue making mistakes that could have easily been avoided.
To expect individuals to rely on ‘common sense’ is simply not enough. Time and time again it has been proven that ‘common sense’ is a rare commodity and cannot be relied on. The answer is formalised or compulsory financial education, at a secondary or tertiary level, before these kids become responsible for the money that they have to live of off.
This comes back to Khalil’s point about people going into debt because they do not know how to distinguish between a need and a want. Everyone knows the feeling of clutching a credit card in front of a store on sale. Suddenly you have ‘cash’ in hand. Why not spend it?
In the future, perhaps financial education will provide a practical answer. But for now, one can only hope the answer would be because they don’t want to go into avoidable debt.
Yesterday:Necessary loans: A house, a car and spare change
Tomorrow: Banks and NBFIs
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