Monday, July 8, 2013

The Hammer Falls

BNM isn’t wasting much time (excerpt, emphasis added):

Measures to Further Promote a Sound and Sustainable Household Sector

Bank Negara Malaysia announces today, the implementation of a set of measures aimed at avoiding excessive household indebtedness and to reinforce responsible lending practices by key credit providers. These measures, which take effect immediately, complements the earlier measures introduced since 2010 to promote a sound and sustainable household sector. The measures are:

  1. Maximum tenure of 10 years for financing extended for personal use;
  2. Maximum tenure of 35 years for financing granted for the purchase of residential and non-residential properties;
  3. Prohibition on the offering of pre-approved personal financing products.

The limits on financing tenure will not affect applications made before today...

...These measures are issued pursuant to section 31(1)(a) of the Central Bank of Malaysia Act 2009 and apply to all financial institutions regulated by Bank Negara Malaysia, credit cooperatives regulated by the Suruhanjaya Koperasi Malaysia, Malaysia Building Society Berhad and AEON Credit Service (M) Berhad. This is to ensure consistency in the financing practices across all the key credit providers.

Not before time. This action was long overdue, and only needed the legislative authority to allow BNM to enforce it effectively outside of the banking system.

About the only other thing I can think of to add to this would be if the government tightened its own limits on salary deductions allowed to civil servants. But that’s obviously not within BNM’s purview.


  1. You (who I respect a lot) believes it's about time. I on the other hand believe that it's a little bit too late. Many are leveraged beyond belief (multiple housing loans, car loans, personal loans, credit card debts) that it only needs BNM to increase it's OPR by a hundred basis points for everything to crumble.

    Having to take a loan to study is one thing. Taking out a loan for a 2nd house or a 2-door continental car or one's 5th credit card or worse, a personal loan just to get married (gasp!) is the reason I'm in the camp that it's little too late.

    Having said that, it's never too late but when it blows, it ain't gonna be pretty so let the countdown begin...

  2. hyelbaine,

    1. The transmission of policy rate changes into lending rates is "incomplete" i.e. less than 100%. My calculations suggest less than 25% of any policy rate increase would actually end up affecting new loans, and about 36% for existing.

    2. Highly leveraged households appear to be concentrated among lower income households, but the aggregate amount is small relative to the banking sector.

    There are two ways of looking at this problem. From a systemic perspective, the impact on banks of any likely problems arising from over leveraged households is likely to be minor. We don't exactly have the securitisation problems that triggered the 2008 crisis in the US. The impact on non-banks is probably going to be greater, as they are more highly exposed and their credit standards are considerably lower. Having said that, many of the households involved are civil servants, so repayments should not be a problem.

    The other perspective of course is from the leveraged household point of view. I don't know if it should be the responsibility of BNM or the government to tell people how to manage their own finances. Nor do I think that it would necessarily stop people from over-leveraging if the opportunity arose.

    My feeling is that financial literacy education instead should be incorporated into the primary and secondary school syllabus, though I do recognise that many still won't act rationally when it comes to money (and status).

    There are very few policy levers available here, unless we want to go back to the bad old days of financial repression, where lower income households had little to no access to banking, let alone financing.

  3. I am quite agree with your last paragraph.

  4. me and my wife bought a terrace house under construction and took out a loan for 30 years. i'm parking my savings in a special account that bears the same interest as our loan (monthly charge RM10 and one time account opening fee of RM200). So the loan will be paid out of this account over time and i am also free to withdraw my money if i need to invest in stocks etc.

  5. oh hell's bells, the damned account doesn't bear any interest, it's only that for eg if my loan is RM200,000 and i park RM100,000 into this special account, i pay interest on the balance RM100,000 only. sorry for misinforming earlier. So, end of the day, i still gotta pay interest to the bank, except that it's less than if i were to pay in conventional monthly instalments

  6. I would rather believe that the problem is not truly the availability of financing, it is more that those provided the financing are over extended in the first place and should not have been provided the facilities. The lack of understanding of economics and finances are the result of an education system that have neglected the understanding for savings, the understanding of using financial products. If the government wants to control risky financial behavior it should put an effort in educating our school kids about savings, risks, financial tools so that they get an understanding of the opportunities and risks of using bank and credit facilities. Curbing lending is of course the easy way out, but there are a ton of loan sharks out there that can still put a lot of Malaysians under water.

  7. Hi Hisham H
    We don't exactly have the securitisation problems that triggered the 2008 crisis in the US. The impact on non-banks is probably going to be greater, as they are more highly exposed and their credit standards are considerably lower

    I reviewed some banking data and on the surface , it does seem to be the case. NPL's are low - right now. That said, there are fundamental laws of economics that are being tinkered with, and the effect may be perhaps 2 years in the future (perhaps).

    The fundamental law is rising asset prices which are not matched by incomes. Using the Minsky hypothesis, borrowers repay by asset appreciation once they are unable to service principal or interest payments.

    Right now, with rates low - a lot of this is still under the credit tide. But what would be the effect of a +200 bps increase in rates.

    After all, 10 year Ts have increased in yield by 100 bps this year on the Taper announcement. Ringgit is falling and current account dangerously close to deficit.

    I always suspect the first domino to fall will be commercial real estate as the demand is relatively inelastic and supply* is poised to expand from 104.61 million sq feet to 123.47 million sq ft (18% expansion). This excludes mega projects++. That should force down the occupancy rate from 80% to 65% - with some real bad effects on pricing.

    We await the inevitable.

    *Data: "Too much office space in the Klang Valley"

    ++Excludes Tun Razak Exchange, KL Metropolis near Matrade, former Pudu prison redevelopment and Bandar Malaysia ("Endless Possibilities") near Sg. Besi.

    1. Shadow Banker,

      The media is late to the party as usual. Yes, incoming supply of commercial office space is a concern.

      I don't think we'll see too much correlation in interest rates between Malaysia and the US - because the Ringgit is nonconvertible internationally, BNM has considerable discretion to set conditions within the domestic monetary system.

      In any case, there is a boatload of excess liquidity in Malaysia, which would tend to dampen any tendency for market interest rates to rise. Note that MGS yields have barely budged in the last few months.

      Also, the transmission of Fed action into Malaysian interest rates is incomplete. The last tightening exercise by the Fed (from 1% to 5.25% - over 400bp from 2004-2006) was matched by a 50bp increase in lending rates in Malaysia. 5Yr MGS traded in a 100bp range around 4.0% during the same period.