Tuesday, April 2, 2013

For Malaysians, a monthly juggle to escape credit card debt trap

For Malaysians, a monthly juggle to escape credit card debt trap

By Zurairi AR, Boo Su-Lyn and Emily Ding
April 02, 2013
Malaysian Insider
Many people have fallen into debt due to their poor use of credit cards. — Picture courtesy of savemoney.myKUALA LUMPUR, April 2 —  Despite several optimistic views of the economy for 2013 and beyond, Malaysians are struggling to save while attempting to clear off mounting debts as the country flirts below the 55 per cent debt-to-Gross Domestic Product (GDP) ratio ceiling.

The rosy economic view comes ahead of Election 2013 but economists have expressed concern with Malaysia’s ballooning ratio of household debt to its GDP that hit 80.5 per cent last year, pushed mainly by credit card and personal debts.

“It’s because Malaysian households now are very keen on borrowing money,” said Malaysian Institute of Economic Research (MIER) executive director Dr Zakariah Abdul Rashid, explaining the main cause for the nation’s rising household debt.

He said that Malaysia’s household debt-to-GDP ratio was one of the highest in the region, although some other countries have racked over 100 per cent.

Malaysia’s household indebtness has steadily increased from 75.8 per cent in 2010 to 76.6 per cent in 2011, and to 80.5 per cent last year, prompting calls for vigilance from financial analysts in the region.
“One of the reasons is lifestyle ... they fall into the trap because of poor financial planning,” said Mohamed Khalil Jamaldin, head of corporate communications from the Credit Counselling And Debt Management Agency (AKPK).
Khalil explained that 25 per cent of the around 84,000 people who enrolled for AKPK’s debt management programme fell into that category, which includes overspending and failure to pay the minimum monthly amount.

Credit card debts
Advertising and design entrepreneur Samantha Fong (not her real name), 36, was one such debtor, after she and her husband incurred debts of about RM10,000 and RM20,000 each two years ago from an unfortunate business loss.

Earning a household income of between RM5,000 and RM6,000 per month, Fong could only afford to pay around RM600 monthly for her two cards, while her husband could pay between RM300 and RM800 monthly depending on his income for that month.

Intan Jacquelina (not her real name), 34, is a single mother who got saddled with around RM10,000 of credit card debt from spending close to RM8,000 when she moved to a rented 1,000-square feet condominium unit in Kinrara, Petaling Jaya from Johor.

“You have to pay the deposit, plus all the furniture inside ... I used credit card because I didn’t have cash. I never managed to reduce it,” Intan told The Malaysian Insider.

The civil service executive confessed that she could only pay the monthly minimum of RM500 with her take-home pay of RM5,500 monthly, despite knowing that it will only pay her seven per cent interest while the principal sum stays unaffected.

Khalil explained that using credit cards to pay the downpayment on a house or car is a misuse of the credit card, which amounts to 13 per cent of the agency’s cases.

Easy credit
Meanwhile, Zakariah blamed the ease of lending money for the huge number of indebted Malaysians, contributed by high liquidity in the banking sector.

“If they don’t give out loans, they will not make any revenue. Their performance, their key performance index (KPI) are based on their revenue,” he said.

Just two Fridays ago, five people were charged in a Session Court with cheating Agro Bank of RM275,000 by fraudulently applying for personal loans, demonstrating such ease.
... I used credit card because I didn’t have cash. I never managed to reduce it. — Intan Jacquelina, a single mother who is saddled with around RM10,000 of credit card debt
Bank Negara Malaysia (BNM) has tried to curb rising credit card debt by raising the minimum income requirement for credit card eligibility from RM18,000 to RM24,000 per annum.

The central bank has also capped the maximum credit limit to double the monthly income of the cardholder per issuer for those earning less than RM36,000 per annum.

However, RAM Holdings chief economist Dr Yeah Kim Leng noted that it was becoming easier to ask for loans as more people are turning to non-bank financial institutions (NBFIs) such as building societies and co-operatives.

“These measures do not govern NBFIs. NBFIs are not supervised by the central bank,” he said, referring to the tight regulations that conventional banks have to follow.

Despite accounting for only 12 per cent of total household credit, NBFIs and development financial institutions (DFIs) account for 57 per cent of personal financing credit.
This has caused an increase in the percentage of personal financing over household debt from 16 per cent in 2011 to 17 per cent last year.
Credit bubble
Several analysts said Malaysia risked being mired in a credit bubble which is looming in Asia’s emerging economies, which also include Singapore, Thailand, China, and Taiwan.

If the bubble bursts, Zakariah warned of havoc when households default on their debts, causing a mini version of the 2008 subprime crisis in the United States which forced foreclosures and the collapse of several financial institutions.

Yeah also anticipated that there would be a “mild shock” to the banking system, with a rise of about two to three per cent in non-performing loans.

Low-income groups who cannot keep up with the urban high standard of living form the bulk of the increase in lending, thus carries the biggest risk if the credit bubble bursts.

According to BNM, most of borrowers from NBFIs earn less than RM3,000 monthly, with 80 per cent of personal loans granted to civil servants.

Zakariah, however, denied that a credit bubble is imminent in the near future, and explained that BNM has been preparing for the scenario since two years back.

“The Financial Services Act (FSA) is likely to come into force this year,” said Yeah, referring to regulations which will rein in the NBFIs.

BNM governor Tan Sri Dr Zeti Akhtar Aziz said last month that the central bank was supervising the country’s household debt, and lending measures have been tightened after the household debt-to-GDP ratio hit 80.5 per cent last year.

Zeti gave an assurance that non-performing loans in the household sector remained at only 1.5 per cent, and repayments stayed strong.

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