Saturday March 24, 2012
Principles and targets of lending guidelines
StarBizWeek posed some questions to Bank Negara via email on the lending guidelines and below are the answers:
SBW: With the responsible lending guidelines in place, do you expect loan growth for the banking industry to slow down this year?
Bank Negara: Many factors affect loan growth such as economic fundamentals, labour market conditions and income growth. Overall, loan growth is expected to continue in tandem with economic growth. The implementation of the guidelines will not curtail access to financing for borrowers who have the means to take on additional debt.
To ensure that individuals and households borrow within their means, financial institutions are required to ensure that appropriate consideration is given to a borrower's needs and circumstances when assessing loan application.
Are the guidelines effective in containing rising household debt and, on the flip side, to strengthen the banking system in the long run?
The guidelines complement a comprehensive range of pre-emptive measures introduced by Bank Negara to prevent the household sector from becoming a source of vulnerability to the financial system and economy. The aim is to prevent individuals from becoming overly-indebted and to discourage the build-up of any unhealthy trends in household indebtedness.
With consumers and lenders focusing on the borrowers' financial capability to afford a loan and the implications of not being able to meet the contracted debt obligations, we expect the guidelines to contribute towards avoiding the excessive accumulation of household debt, particularly among households that are more vulnerable to income shocks.
The guidelines are expected to create awareness and promote financial discipline and responsible practices for both lenders and borrowers. Its implementation will ensure the continued resilience of the household sector and promote a sustainable credit market that contributes to the stability of the financial system and economy as a whole.
Other measures implemented by the bank includes: stricter credit card guidelines for individuals earning a monthly gross income of RM3,000 and below; introducing a financial education programme, POWER!, targeted at young and new borrowers; providing an avenue for individuals to seek advice and assistance from Credit Counselling and Debt Management Agency in managing credit, finances as well as in restructuring existing debts with banks; and introducing maximum loan-to value of 70% on third and subsequent housing loan facility taken out by borrowers.
Do you foresee household debt to rise this year despite the guidelines?
As at end-2011, household debt stood at RM653.1bil or 76.6% of GDP (2010: 75.8%). Moving forward, the level of debt is expected to increase in tandem with income growth and favourable labour market conditions. The guidelines will serve to ensure that the pace of increase of household debt commensurate with the household's capacity to repay.
Do you think there is a need to review the guidelines? Do other jurisdictions also practise this (lending based on net income, among others)?
There are no plans to review it as its principles are sound. However, implementation issues related to the operationalisation of the guidelines have been identified and resolved. These include issues relating to documentation requirements to support loan applications and the need for effective engagement by financial institutions with their customers. Financial institutions have been reminded to ensure consumers who have the ability and capacity to repay will continue to have access to financing.
They are also required to provide more information at branches and in their websites on the documents required as proof of income and other supporting documents required for loan applications.
Reference to net income in the guidelines means income net of statutory deductions such as income tax, Socso and EPF. This provides a more accurate reflection of a borrower's capacity to take on more debt as statutory deductions do not form part of a borrower's disposable income. Apart from this, financial institutions are given the flexibility to determine a prudent debt service ratio level based on their respective lending policies and the circumstances of respective borrowers.
Countries such as Australia, Britain and the United States have also recognised the importance of ensuring a prudent, responsible and transparent financing practice for both consumers and financial institutions and have adopted relevant measures to this effect. - Transcribed by Daljit Dhesi