On Friday the 5th of July 2013, Bank Negara Malaysia (BNM or Malaysia’s Central Bank) announced the following measures ‘to reinforce responsible lending practices by key credit providers’, essentially tightening up regulations for banks and co-ops (ie. koperasi-es) lending money to consumers, effective immediately.
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Why tighten lending conditions?
The role of the central bank in Malaysia is to ensure stability of the financial system (banks, co-ops, credit institutions, agencies, insurers, and us the consumers) so that Malaysia’s economy is not harmed by shocks to the system. One of the largest possible shocks to the system is a wide-scale inability of consumers to repay their household debts due to being too highly leveraged (that is, disposable income becomes insufficient to cover debt servicing installments).
If a large number of households are unable to service their debt, banks and credit institutions will have to suffer losses due to debt write-offs, and then have insufficient capital to lend money to creditworthy households and businesses, hurting the economy.
According to BNM, household debts have been increasing at an annual rate of 12% over the last five years, well over the corresponding national GDP (or other economic indicator) increases, in part due to the offering of financial products with excessive tenures of 45 years for house financing and 25 years for personal financing, as well as the growth of pre-approved loans.
While long tenure loans actually imply lower monthly installment amounts (supposedly making it easier to service), the increased overall household indebtedness from these products comes from a parallel shift upwards in the ability of a household to take on more debt.
To put it simply, with a longer tenure loan, households can take on a larger debt burden than they could with a shorter tenure loan with the same installment amount.
Example:
Assume the maximum tenure for personal financing is 25 years set by banks and personal financing interest rates are 10% p.a. flat (for the sake of easy calculations).
If a bank or credit institution assesses my current financial situation (ie Income – Commitments and Expected Expenses) to only be able to support a maximum of RM500 installment a month, I can borrow as much as RM66,666. If the banks’ maximum allowable tenure for personal financing was lowered to 10 years, I can only borrow a maximum of RM40,000, reducing my net indebtedness. (We’ve included a personal loan calculator below, feel free to check our calculations).
1. Maximum Personal Loan / Financing Tenure set at 10 years
With Personal Financing reduced from the 25 year tenure available from some banks to a maximum of 10 years, consumers will now either have to increase their monthly installment to get the same amount of financing, or settle for a lower amount of financing.
Gone are the 40 year tenures for home financing, making home loans between 15 – 35 year tenures.
Banks and lenders will now have to request for your personal details and consent in order to get a credit assessment and approval for lending, versus the previous practice of pre-approved loans.
http://savemoney.my/bank-negara-malaysia-5th-july-2013-announcement-explained/
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