Friday 29 Mar 2024
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MALAYSIAN favourites nasi lemak, char kuey teow, roti canai and teh tarik have become more expensive since the Goods and Services Tax (GST) kicked in on April 1. If the cumulative cost increase you see post-GST is sizeable relative to your disposable income, you had better watch your spending or risk running into financial difficulties, experts say.

“The enforcement of GST will surely impact the financial expenditure of individuals, especially when there is no increase in their disposable income,” the Malaysia Department of Insolvency (MdI) tells The Edge in an email reply to questions.

“Therefore, the public must remain alert to their financial burden and ensure that unnecessary costs are eliminated from their budget,” it advises, adding that financial mismanagement is a key cause of the general rise in bankruptcies.

As it is, insolvencies have been on the rise in the last four years — spiking 12.3% in 2013 before moderating to 1.7% last year after Bank Negara Malaysia’s stringent regulations to curb the rise in the level of household debt started to bear fruit. Nonetheless, it remains to be seen if the numbers can be kept low under the tougher conditions going forward.

What’s more, most financially strapped individuals are low income earners. According to Agensi Kaunseling Dan Pengurusan Kredit, the central bank’s wholly-owned unit, nearly half of the individuals enrolled on its debt management programme last year earned RM2,000 or less per month.

Although the government is bolstering the social safety net, having announced a RM300 increase in the Bantuan Rakyat 1Malaysia (BR1M) payout for households earning RM3,000 and below to RM950 a year, some economists reckon that the effect of the 6% consumption tax on their disposable income is likely greater than the boost from the cash handout.

“BR1M will only help to some extent but it is not enough to combat the rising cost of living. A sum of RM80 per month per household is not much,” a local economist says, adding that straw polls done after GST’s implementation have shown price increases of 20% to 30% in goods in the market.

non-perfoming-impaired-loans-by-purpose_tsotn8_1062Among the observations in Khazanah Research Institute’s State of Households Report issued last November is that lower income households are disproportionately affected by rising food and utility prices because a large portion of their income is spent on food, housing and utilities.

“The vast majority, the bottom 74% (4.36 million) of households who earn less than RM6,000 a month, live in a world where food prices really matter and savings are measured in the thousands of ringgit,” Khazanah Research points out.

Meanwhile, Bank Negara has noted that households earning less than RM3,000 a month are more leveraged than other income groups. Consequently, they are more susceptible to income or expenditure shocks, such as a reduction in income, unemployment or other emergencies.

A corresponding increase in salary would help mitigate the rising cost of living. “Given that the employment market is tight with the unemployment rate close to 3% currently, low income earners would have greater bargaining power for higher pay,” an economist says.

Though it is the low income earners who need extra bargaining power to fight for higher wages, they are not in a position to get it. Top recruiters told The Edge in February that 2015 was a good year for Malaysian workers insofar as they were skilled professionals in the mid to top level of their field — individuals who are likely to fall into the middle to high income category  rather than low income.

There is also anecdotal evidence of low income earners owing more debt. Some 80% of personal loans given out by non-bank financial institutions (NBFIs) — which were previously not supervised by the central bank — is to government employees with household income of less than RM3,000 a month, Bank Negara was reported as saying in March 2013. The NBFIs include Bank Rakyat Sdn Bhd and Malaysia Building Society Bhd while development financial institutions include Agrobank, SME Bank and Lembaga Tabung Haji.

Bank Negara has since tightened the eligibility for personal financing for low income earners but the fact that the risk of default on some of the NBFI loans to civil servants is low due to automatic salary deductions does not mean the burden of debt on the borrower is lighter.

And although recent data shows the growth in household debt has moderated, its ratio to gross domestic product (GDP) still rose from 86.7% in 2013 to 87.9% last year — among the highest in Southeast Asia. The low interest rate and easy credit regime that helped fuel the real estate bubble in recent years may just come home to roost as the construction of these purchased properties nears completion and the time draws closer for buyers (and speculators) to service their loans.

“Depending on how leveraged and overextended these individuals were during the property boom, we may see the number of bankruptcies rise as a result, given that the property market has now softened,” CIMB Research regional economist Julia Goh tells The Edge.

“However, it wouldn’t be widespread, only selected cases … because the proportion of borrowers who have been given financing to buy multiple properties is relatively small,” she adds.

While Bank Negara’s 2014 statistics show that the greatest proportion of impaired household loans in the banking system was for the purchase of residential properties (60.1%), followed by the purchase of passenger cars (23.1%), bankruptcy data shows the reverse. The insolvency department says the greatest reason for bankruptcy is defaulting on hire purchase, followed by housing loans, most likely because loans to the latter are asset-backed.

More importantly, MdI cites “improper and ineffective financial management” as the probable contributing factor causing hire purchase as the highest cause of bankruptcy cases in Malaysia.

“The attitude of the banking industry towards providing credit to borrowers is also a factor in the increase in bankruptcy cases each year. The banks must play an important role in ensuring responsible lending and impose stricter requirements by looking into the financial capability of their general consumers,” says the insolvency department.

Legal and dispute resolution manager Santosh Kannan, who is adviser to the National Consumer Complaints Centre, claims that irresponsible lending is still happening, for instance, in the case of hire purchase where the valuation of a passenger car is marked above its market value in order for the customer to obtain higher loan value.

“As for credit cards, an outstanding amount of RM300 can easily balloon to RM6,000 in a year or two. The bankruptcy notice often takes the individual by surprise and he will find himself unable to take a loan to pay the lump sum as he would have been blacklisted,” he says.

Santosh advocates raising the individual bankruptcy threshold to RM100,000 from RM30,000 under the current Bankruptcy Act, 1967, that is currently under legal reform as bankruptcy can have an unjust impact on an individual, who may be a victim of circumstance rather than a spendthrift.

However, the insolvency department wants to retain the current RM30,000 bankruptcy threshold. “A higher threshold would only encourage the consumer to get credit and the banks to grant more credit to consumers with a bad credit history before they can commence on a bankruptcy proceeding and it will, in turn, make it difficult for an individual to recover from his debt,” it says.

Whatever the threshold, a consumption tax on Malaysians has come to pass, leaving less room for “improper and ineffective financial management”.

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This article first appeared in The Edge Malaysia Weekly, on April 13 - 19, 2015.

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