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| When All Things Fail! |
The top reasons for this malaise? Housing loans, personal loand and hire purchase loans. There is a direct correlation as the components of household debts constitute these three loans though not in the same order.
For household debts,[according to Bank Negara], housing loans make up the top cause, followed by car and personal loans, whereas in bankruptcies, car loans top the list, followed by personal and housing loans.
A total of 19,167 bankruptcy cases were registered by the department last year, up from 13,855 cases in 2008.
Bank Negara in its annual report for 2011 stated that household debts to gross domestic product (GDP) ratio was 75.8%, up from 69% in 2006. Based on the revised GDP figure of RM881 billion, this roughly amounts to RM667 billion.
Of that figure, 45% of all household debts, or around RM300 billion, were in residential property loans alone.
While acknowledging that high household debt level is a cause for concern, Malaysian Rating Corporation Bhd chief economist Nor Zahidi Alias told theSun that it will only really start to affect economic growth if the ratio reached a level of 85% of GDP.
That means we have less than 10% to go before disaster starts!
"It is not surprising to see that household debts correlate directly with consumer bankruptcy cases.
"The higher the debt level, the more likelihood of the debtor not being able to repay the debt," he said.
Nor Zahidi warned that Malaysia is at the level where it should be more cautious about the household debt problem.
"As we have seen from past experience, high household debt level can lead to a collapse in consumer sector as happened in South Korea in 2003.
"For that reason, Bank Negara has been cautious and introduced prudent guidelines for lending in January this year to ensure that the problem can be contained in the next few years," he said.
Among the measures put in place included tighter lending guidelines for banks,including using net income calculation method instead of gross income when computing the debt-service ratio for potential borrowers.
The number of bankruptcy cases in Malaysia has shown an increasing trend for the past few years.
Minister in the Prime Minister's Department Datuk Seri Mohd Nazri Abdul Aziz told Parliament on June 14 that between 2005 and April this year, the Insolvency Department saw 116,379 people being declared bankrupt.
Besides the three reasons for bankruptcy, social and corporate guarantors as well as business loans and credit card debts made up the other major causes of bankruptcy.
Haini said the reasons for the increase in bankruptcy cases were varied.
"Sometimes there is mismanagement of funds, but with the recession, there has been loss of employment or the effects of recession that weren't foreseen.
"The effects of recession only start to show after a year or so," she said, adding that it was the lower income group who would be most vulnerable.
Haini advised people to always spend within their means, and set aside savings before thinking about spending or taking out loans.
"The important thing is to work with your disposable income figure in mind, not your gross income, as that can be misleading because there are financial obligations," she said.
Haini also urged people who genuinely cannot service their loans to come forward as there is better protection for registered bankrupts under the law.
Once a bankrupt under the law, the Insolvency Department becomes the bankrupt's trustee and facilitates payment to the creditors, meaning the debtor cannot be harassed, she said.
Any student of economics can tell you about the formula;
Y=C+S+I
Where Y represents income; S for savings and I for investment.(CSI Strategy)
An astute mind will ensure that for the CSI strategy, after consumption which should not be more than 50%(including household utilities), 30% should be put into savings such as fixed deposits, sukuk funds and bonds ( For the rainy days as well as dog days of finance). The balance of 20% should be put into investment which must be diversified. If you already have an accumulated sum, go for property, then reits and finally good blue chips and high dividend paying companies.
Try to avoid buying new cars when the current one is still good and serviceable. Do not do unnecessary renovation until you have some spare cash. A bonanza of sorts!
Do not be a guarantor as this can really pull you down and cause an upset in your CSI. This misadventure will spring a leakage when your ward or beneficiary fails you.
I was a guarantor for a KUBB personal loan in 1993 and had to coughed out RM4,000 when my name appeared for a bankruptcy proceeding in court. Three persons were guarantors but they selected only me because apparently, I was the only person with the relative "deep pockets". So, learn from my lesson and refuse to be a guarantor!
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