This article first appeared in The Edge Malaysia Weekly, on November 16 - November 22, 2015.

LYDIA, in her early thirties, is frustrated with her sister’s debt issues. Her sister Milly, a clerk who is two years younger than Lydia has accumulated an outstanding credit card balance of more than RM100,000 for beauty treatments over the years.

Milly, who earns less than RM3,000, once had five credit cards plus two personal loans.

Due to the snowballing credit card balance, Milly is currently under the Agensi Kaunseling dan Pengurusan Kredit debt management programme and will only finish paying off her debts in the next 15 years.

“Half of the debt comes from interest charges on Milly’s credit card. It’s really frustrating that I have to help pay off her debts too. There goes her life… and mine too,” says Lydia.

Lydia and her family who have many times considered letting Milly file for bankruptcy, but they did not pursue that drastic action because the young lady is a co-owner of the family’s only asset — a low-cost apartment.

“If Milly files for bankruptcy, the whole family will lose the roof over our heads,” Lydia tells TheEdge.

Does this sound familiar to you?

It wouldn’t be a surprise if many of the young generation — commonly known as the Gen Y population, born between 1980 and 2000 — are able to relate to the rut the sisters are in.

A survey done by the Asian Institute of Finance (AIF) titled “Financial Matters — Understanding Gen Y” shows that Gen Y are taking on debts at an earlier age while they lack knowledge in financial planning.

The survey reveals that 38% of Gen Y respondents have taken out personal loans while 47% of them have outstanding credit card borrowings.

It also points out that 70% of those owning credit cards only make the minimum monthly payment. Settling the accumulated outstanding balance is not quite the priority for most of them. It would be rather painful to do so, as the repayment would take up the bulk of their monthly salaries and leave little for spending.

“Gen Y are more accepting of taking up loans. It has become the norm for a fresh graduate to take a car loan because they need a car to commute to work.

“Many have little financial commitment — for example, they don’t worry about lodging because they still live under their parents’ roof.  This could spur their urge to spend more to keep up with their peers and eventually ending up in debt,” an economist opines.

While the Gen Y’s lavish spending habits and the lack of financial discipline are partly to blame for being a debt-laden generation, economists say the easy availability of credit certainly does not help the situation.

“Banks are competing aggressively to expand their loan portfolios these days. Part of it can be a result of the low interest rate environment we are in and also because of the increasingly competitive nature of the industry. Usually, those entering the job market for the first time will be the targets for financial institutions and these fresh employees usually leverage up,” says Dr Yeah Kim Leng who is the Dean of School of Business at Malaysia University of Science and Technology.

Yeah opines that the current low interest rate environment appears to be creating a generation of risky borrowers where income may not necessarily match their borrowings.

His view is that the Gen Y who leverage up are more vulnerable to economic shocks.

Retired economist Lee Heng Guie opines that using leverage to finance spending would eventually become unsustainable.

“You don’t want a society that borrows to spend. Some leverage is fine, but it shouldn’t be excessive borrowing. Gen Y want to have a balanced lifestyle but this needs to depend on their income capabilities. It shouldn’t be the case of unproductive consumption,” he says.

Take the example of an accountant who is in his late 20s. He tells TheEdge that he took out a RM10,000 personal loan “for the fun of it” as it was offered to him by a bank. The extra cash in hand would come in handy for his dates in expensive restaurants, throwing parties for friends and, of course, the latest gadgets.

“As long as I can service the monthly minimum required payment, that’s fine isn’t it?” he justifies. To him, that is probably spending within his means.

The robust spending by Gen Y to a large extent helps to spur the domestic economy.

There are an estimated 8.57 million Gen Y in Malaysia. This generation has already overtaken the Baby Boomers — estimated at 4.72 million — in number, according to statistics by the United Nations, Department of Economic and Social Affairs, Population Division.

“Gen Y in Malaysia make up the largest population of consumers, have a high level of spending power and make informed decisions on their purchases. As the Baby Boomers in Malaysia retire from the workforce, Gen Y will increasingly take over more senior positions and will form the largest consumer segment,” says AIF in the executive summary of its survey.

Although not all who were born after 1980 are spending beyond their means, the growing debt burden of this young generation could become a snowballing economic problem, particularly when economic conditions turn tough, or the banks raise lending rates.

“They may not be at the point of default when interest rates go up, but there will be more pressure on them to service their loans. But if they are out of a job, the risk of default will increase because they have a lower savings rate compared with their parents’ generation,” says Yeah

Bankruptcy numbers among the younger generation have been on the rise over the years, an economist points out.

“An increase in interest rates or the tightening of available credit would hamper Gen Y or even other groups of the population from taking out loans, but if the behaviour towards loans and spending does not change, I think we will still see a rise in debt and credit card defaults,” opines the economist.

According to the 2013 annual report by the Department of Insolvency, 4,908 bankruptcy cases, or 27% of the total, registered in 2013 were in the age group of 25 to 34 years, compared with 3,970, or 20.3% of bankruptcy cases among the same age group the year before.

While there are no specific loan data that can be attributed to the Gen Y, one economist points out that the non-performing loans (NPL) of credit cards and residential property has been inching up over the last three months.

Credit card NPL rose to RM469.1 million in September from RM452.5 million in July while residential property NPL increased to RM5.16 billion from RM5.06 billion during the same period.

Lee believes that education is necessary for the Gen Y. “It is a generation change and it needs to be managed.”

Nevertheless, Yeah notes that Gen Ys should not be generalised. He says that not all of them have takern on heavy debts.

“If the average Gen Y borrows at levels limited to their income and continues to have the capacity to generate income, the situation may not be as dire,” explains Yeah.

It could be some form of comfort to know that Malaysia’s ratio of household financial assets to debt has been consistently maintained at more than two times over the last three years, meaning that financial assets outweigh debts. But how many of the debt-laden Gen Y are spending their money on assets that appreciate in value?

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