Monday, November 21, 2011

BNM Clampdown

I've just had an accident with my laptop - involving a full mug of tea - so I might be offline for a while until I can resolve the problem.
In the meantime, along with the GDP report last week, BNM made two announcements. The first one deals with regional financial integration (excerpt):

Bank Negara Malaysia will be expanding the list of eligible collateral following greater regional financial integration. This is aimed at enhancing the liquidity management framework. This is in line with the growing significance of regionally active financial institutions which have intensified the financial inter-linkages between economies, particularly in trade, investment and financial services.
In essence, what it means is that BNM is laying the groundwork for financial settlement of cross-border transactions in anything other than US dollars, to go along with the existing swap line arrangements between the region's central banks. Since this means that intraregional trade need not be denominated in US dollars (which requires US dollar liquidity domestically), it also lessens the necessity for keeping excessive US dollar reserves. Malaysia's direct trade with the US is just 10% of total trade, whereas regional trade ex-Japan is at nearly 60%. Recall that the recession of 2008-2009 in Malaysia wasn't really a factor of a drop in real external demand, but a serious drop in US dollar liquidity from flight to safety and a sharp drop in trust within correspondant banking networks.
Reducing exposure to US dollar risk therefore makes some sense, even if some of our regional trade partners have, shall we say, less than trustworthy currencies.

The second announcement is of more immediate interest, and worth quoting in full (emphasis added):
Measures to Promote Responsible Financing Practices

Bank Negara Malaysia issued today guidelines to financial institutions aimed at promoting prudent, responsible and transparent retail financing practices. The guidelines which will take effect from 1 January 2012 complement other measures that promote better protection for financial consumers and a sustainable credit market that contributes towards preserving financial and macro-economic stability.

The guidelines require financial institutions to make assessments of a borrower's ability to afford financing facilities based on a prudent debt service ratio as inputs to their credit decisions. Financial institutions must make appropriate enquiries into a prospective borrower's income after statutory deductions for tax and EPF, and consider all debt obligations, in assessing affordability. While this is consistent with the current practice of most financial institutions, the guidelines will facilitate a sharper focus and more consistent approaches across the industry to assessments of individual affordability. This guideline will thus ensure that the increasingly competitive conditions will not lead financial institutions to compromise prudent and responsible financing practices.The Guidelines also stipulate that the maximum tenure for vehicle financing applications that are received from 18 November 2011 should not exceed nine years.

The guidelines additionally aim to encourage sound borrowing decisions by consumers through better engagements with financial institutions that will help consumers carefully consider their ability to service all their debt obligations without recourse to further debt or substantial hardship. Clear expectations are also placed on financial institutions to ensure that consumers are treated fairly in the sales, marketing and administration of financing facilities. Financial institutions are also required to provide consumers with specific information on the total repayment amount and total interest cost as well as the impact of an increase in the financing rate to ensure that consumers understand the full implications of a borrowing decision. Bank Negara Malaysia will continue its surveillance and supervisory activities to ensure that the requirements are properly implemented.

Apart from the financial institutions under Bank Negara Malaysia's purview, the Cooperatives Commission will also be imposing requirements on responsible financing practices on credit cooperatives. This will ensure that key providers of financing to the household sector will observe similar responsible financing practices.
The implementation of debt service ratios into banks' credit decisions has been rumoured for some time. Not that this isn't being done by our banks previously, but what BNM is doing is setting an industry standard while at the same time giving teeth to any move towards slackers.
But the more important move is probably that last paragraph, where the same standards are going to be implemented in non-bank financial institutions. It's been a sore point with BNM for a few years now that households are being allowed to leverage up without the credit culture and approval protocals so painstakingly built up over the years within the BNM regulated financial sector. Especially since BNM has had to come to the rescue in years past and could be required to do so again in the future, yet with little influence over the development of non-bank credit. With any luck, this move will hopefully head off trouble from that direction, though I'm not too hopeful - the non-banks have had a field day in the last 2-3 years, and that buildup of exposure combined with lax credit controls might have already gone too far.

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