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Sunday, 25 March 2012

Asean needs to rise to its own loftier level

After nearly 45 years, issues remain for Asean to sort out, ponder over and resolve satisfactorily.

SOME developments have lately resulted in multiple challenges confronting Asean. Chief among these is the lack of understanding of Asean, its origins and its purposes, notably within Asean member countries themselves.

Since its inception in 1967, Asean has tended to avoid calling a spade a spade for reasons of national sensitivities or avoiding controversy. The founding meeting in Bangkok that year was even described as an effort to improve economic relations, even though more serious geopolitical issues such as Indonesia’s relations with Malaysia and Singapore were at stake.

Another reason for the lack of an Asean awareness among Asean peoples is that official proceedings have been dominated and even monopolised by national elites. Even with economic development as a key issue from the beginning, the Asean Business Council took three decades to be established.

Security drill: Cambodian riot police during an exercise to prepare for the upcoming Asean summit in Phnom Penh. Cambodia hosts the 20th Asean Summit next month. — EPA
 
Social and cultural issues would have to take even longer. Everything had to undergo a laborious process of initial proposal, official consideration, outsourced study (such as an Eminent Persons Group), considered refinement, likely revisions, possible horse trading, formal approval and final adoption.
Even if the entire process is necessary, it could also be expedited. More important yet, parallel processes could occur to dovetail the sequential stages.

That would mean involving more people and agencies than just the heads of government, key ministers and secretariat staff. And that would imply educating, engaging and empowering more people in Asean countries about Asean and its work.

Thus the third reason for the lack of awareness is that little or nothing has been done to inform and involve more people in the region. It might be said that an inherent danger lies in a new generation of Asean citizens growing up under-informed about regional imperatives, except that even the older generation is equally unaware.

Some critics have blamed the custom of consensus-reaching for the plodding pace, but other regional organisations like the EU have not experienced consensualism as a nagging problem. The respective agendas of individual governments, which change quicker and less predictably in some Asean countries than in others, could be a factor.

Nonetheless, Asean’s challenges of economic productivity and competitiveness, geopolitical confidence-building and comfort levels, and socio-cultural peace and stability remain. If anything, developments such as a rising China and India, a resurgent Russia and a revitalised US foreign policy focus on East Asia only make Asean cohesiveness more urgent yet also more fraught.

Asean itself has responded by scheduling an Asean Community by 2015 comprising three pillars: an Economic Community, a Security Community and a Socio-cultural Community. Could this goal be too ambitious, since it had taken 21 years just to convene the third Asean summit?

To help the process along, Malaysia’s Foreign Policy Study Group recently held a roundtable conference on Malaysia-Indonesia/Thailand/Vietnam relations in strengthening Asean Regionalism.

The non-official occasion was intended to complement, not compete with, formal Asean processes and proceedings. Still, a fundamental question asked by some delegates was why the event had to be limited to just four of the 10 Asean countries.

The answer should be obvious: limits on resources including time, and a limited effort such as this had to start somewhere. More Asean countries would participate in future roundtables, and Asean itself provides for small initial efforts in its “10 - x” formula.

There were reasons for the four Asean countries that participated through their retired officials and student representatives: Malaysia and Indonesia as the key founding members of Asean, Thailand as Asean’s origin in the 1967 Bangkok Declaration, and Vietnam in generally being regarded as the main country among the newer (CLMV) members.

Another question concerned more frequent use of currency swaps among Asean countries, and the prospect of greater reciprocal use of national currencies in bilateral trade. This would avoid exchange rate costs with the use of a third-country currency such as the dollar or euro.

Some participants thought the membership of 10 countries was sizeable and a likely source of problems in discouraging common agreement. If that is an issue now, it could grow since Timor Leste is poised to be the 11th member, with Papua New Guinea conceivably waiting in the wings.

Some foreign participants credited Malaysia with having achieved considerable success in economic and educational development. The disparities within Asean also mean that each country could excel in a particular area, so it would help all members if a panel of best practices for a variety of sectors could be established, with contributions from each country based on its experiences and achievements.

A reference was made to Asean’s policy of non-intervention in the internal affairs of member nations by way of a criticism of its seeming inaction. However, that policy as derived from Bandung is a universal principle common to all regional groupings, without which unwelcome and hostile unilateral actions would be rife.

More to the point, Asean appears to have adopted non-intervention to the extent of not even remarking on the travails of a member country even when problems spill over into a neighbouring country. In practice, concepts like “non-intervention” are largely defined by Asean to begin with, so Asean can act without seeing itself as acting.

An underlying but unspoken issue was that Asean countries are fully capable of handling the problems within and between them. There is no basis for major power intervention, since that would unduly complicate and compound the original problem.

Cross-border issues are routinely managed, while rival maritime claims linger. The only enduring problem is an inability to form an all-Asean military force, even if that is desirable.

To help boost Asean awareness, Asean scholarships, student exchanges, an Asean Day in August, a Visit Asean Year promoting the region as a tour package, and a popular talent-entertainment programme appealing to young people are possibilities. But until today, even an Asean lane at airport immigration counters as proposed by a former Malaysian foreign minister more than 20 years ago has still not taken off.

In reshaping an Asean for the times, its basic ingredients of peace, freedom, neutrality, amity and cooperation need to be maintained while addressing current needs and challenges. But whether there is any Asean leader today with the requisite regional vision is still very much an open question.
  
Behind The Headlines By Bunn Nagara 

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Politics, Religion don't mix!

In U.S., a growing unease at mixing politics with prayer
By Stephanie Simon

REUTERS - Americans are increasingly uneasy with the mingling of religion and politics, according to a poll released Wednesday by the Pew Research Center, in the midst of a campaign season punctuated by tussles over the role of faith in the public square.

Back in 2001, when Pew first asked the question, just 12 percent of Americans complained that their politicians talked too much about religion.

That number has risen steadily ever since and hit a record high in the new poll: 38 percent of Americans, including 24 percent of Republicans, now say their political leaders are overdoing it with their expressions of faith and prayer.

And more Americans than ever, 54 percent, believe churches should keep out of politics. That's up from 43 percent in 1996, according to the Pew Research Center.

The national poll of 1,503 adults, which has a margin of error of 3 percentage points, was conducted in early March, as the U.S. Conference of Catholic Bishops was ramping up its vigorous campaign against a new federal mandate requiring all insurance companies to provide free birth control.

The bishops continue to press that fight. Just last week, they issued a statement declaring they were "strongly unified and intensely focused" on battling the contraception mandate.

A leading voice in that campaign, Bishop William E. Lori of Bridgeport, Connecticut, this week was promoted to Archbishop of Baltimore by Pope Benedict XVI.

Peter Steinfels, co-director of the Center on Religion and Culture at Fordham University, said Americans have generally tolerated and even encouraged religious leaders to speak out on broad political issues, including capital punishment, immigration and poverty.

MORE SKEPTICAL

But Americans have long been uncomfortable with religious leaders directly involved in partisan campaigns, he said.

In recent years, most notably in the birth control battle, that line has been blurred, Steinfels said - which may account for the growing unease on display in the Pew poll.

"Religious leaders ought to be worried," Steinfels said. "We're seeing Americans becoming more skeptical" about the propriety of religious involvement in politics.

The bishops have sought to portray the contraceptive mandate as one prong of a broad attack on religion by state and federal authorities. The leading Republican presidential candidates have echoed that rhetoric on the campaign trail, accusing the Obama Administration of declaring war on religious freedom.

The Pew poll found evidence that argument is resonating with Catholics. Roughly one in four U.S. voters is Catholic and they are a crucial swing vote in several states pivotal to the 2012 presidential election, like Ohio, Michigan and Pennsylvania.

The poll found 25 percent of Catholics perceive the Obama administration as unfriendly to religion, up from 15 percent in a Pew poll taken in August of 2009.

The increase is even sharper among white Catholics, jumping to 31 percent from 17 percent, Pew found.
Among the public overall, 23 percent describe the Obama administration as unfriendly to religion, up from 17 percent in 2009. But another recent poll suggests the "war on religion" argument isn't gaining traction with most adults.

A national survey conducted this month by the Public Religion Research Institute found a majority of Americans, 56 percent, do not believe religious liberty is under siege.

Republicans, senior citizens and white evangelicals were most likely to see a looming threat to religious freedom.

(Reporting By Stephanie Simon; editing by Marilyn W. Thompson and Todd Eastham) 

Malaysian politicians return of the silly season?

 The happening days are back in Malaysian politics but the seasoned ordinary Malaysians are not even batting an eyelid.

IT’S dubbed the silly season by the media and for good reasons. In the months ahead of the general election, politicians will say the silliest things as both sides of the divide fire at each other. Often, the media get caught in the crossfire.

Many see agenda when there is none, presumably because as politicians they are used to the murky world of self-interest and plots.

Unsure of whether they will get re-elected, or worse, dropped as candidates, many are understandably jittery and overly-sensitive as the pressure builds up. After all, much is at stake.

Wanting to get the attention of their party bosses, they start bombarding media offices with tons of press releases, many of which are hardly newsworthy.

The political minnows are unlikely to get their news across and that’s when news organisations are accused of sidelining them for purported political motives.

Then there are rural-based politicians who wonder why they do not get any coverage at all. They insist on the presence of the press even when most of the newspapers do not reach their constituencies, let alone read by the voters there.

There are politicians who blame everyone for their failings except themselves. Again, their critics and the media get the blame.

There’s another group of has-been politicians. They have held positions including Cabinet posts for what feels like forever but never seem to be able to fade away. They still refuse to find time to play with their grandchildren.

So, come election time, they will find a way to get some publicity, including trying to seek a seat to contest or to quit their party.

Retirement age, it would seem, is only for the ordinary citizens, not for politicians. We have got two generations contesting in polls. We have father-son teams, a husband-wife-daughter team, and with Malaysians increasingly living longer, we may end up having their grandchildren as fellow candidates too.

By now, Malaysians are used to the saying that there are no permanent friends and enemies in politics. So, last week, former Selangor PAS leader Datuk Dr Hasan Ali was accused of spending lavishly during his tenure in the state government, including “wasting” RM300,000 to renovate his office.

The allegation was made by PKR’s Azmin Ali, the Gombak Setia assemblyman, who also said more than RM500,000 was spent on a conference organised by the Selangor Malay Customs and Heritage Corporation.

Barisan Nasional rightly asked why Azmin was only making this revelation after Dr Hasan had left PAS and Pakatan Rakyat.

But politicians always have an answer for every question, no matter how illogical it sounds. Azmin replied that he only received the evidence recently and had asked PAS to probe the matter even before Dr Hasan was sacked.

The state executive councillors are located on the same floor at the state government’s office and no one is going to believe that no one knew renovations were being carried out in Dr Hasan’s office. It’s the same with the purported expensive conference.

Surely, there must have been meetings on the budget allocated for the conference and it is difficult to accept that no one knew about the allocated sum.

Barisan state assemblymen have rightly asked whether these would be exposed if Dr Hasan had remained in PAS and had not rebelled against the state government.

Dr Hasan, in any case, was supported and campaigned for by the same Pakatan leaders in the 2008 elections. The same people who criticised him now are the same people who had heaped praises on him then, persuading people to vote for him.

It’s never a dull day in Malaysian politics – on some days it is amazingly incredible – but at the same time, Malaysians are not getting surprised any more.

Saturday, 24 March 2012

Malaysian banks tighten the screening of loans

THE local property sector is expected to see some “cooling down” in the number of transactions this year following the implementation of the responsible lending guidelines by Bank Negara on Jan 1.

According to Real Estate and Housing Developers Association (Rehda) president Datuk Seri Michael Yam, transactions are now taking a longer time to crystallise as banks are grappling with more data required for processing loan applications.

Yam says transactions are taking a longer time to crystallise.

“Buyers are also not committing to purchases until they get clearance from banks that they will be offered the loan applied for, which may or may not be sufficient for them to purchase the property they desire.

“The first segment to be affected is obviously the residential component. For the non-residential, especially commercial properties which may be bought by companies or partnerships, we understand the new formula is not applicable,” he tells StarBizWeek.

Yam feels that the new ruling will have a huge impact on the middle-income segment.

“However, it is common for this group to actually have double (or even) triple incomes from their second and third jobs, but may not have documents to support higher loan eligibility. While prudent risk
management is good, financial institutions must also play a facilitative role in the home ownership agenda by assessing each application on its own merit and not blanket applications across the board.”

He adds that the affordable housing segment will probably be the most affected segment as borrowers are likely to be less affluent, with lower income and disproportionately higher expenditure.

“We predict headwinds for sales in this critical segment, which is contradictory to the wish of the Government to encourage home ownership,” Yam says.

Chang says the entry level market will be the most affected.
In light of this situation, Federation of Malaysian Consumers Association (Fomca) chief executive officer Datuk Paul Selvaraj is urging the central bank to perhaps ease the loan application process, such as making it easier for consumers to switch banks if necessary.

“Consumers, if they feel that they can get a better deal with another bank for their housing or car loan, should be able to do so with ease and at minimum costs. Consumers often feel overwhelmed at the procedures for changing banks. The process should be simplified. The ease of bank switching would promote better quality of services from the banks through competition.

“There should be greater emphasis not only on policy measures but on financial education. Not enough is being done to provide appropriate financial knowledge and skills to consumers,” he says.

One industry observer concurred that the responsible lending guidelines will have the biggest impact on the lower income group.

“This group of people are already earning a low salary and with stricter lending rules, getting loans could be made more difficult.”

National Housebuyers Association (HBA) secretary-general Chang Kim Loong says the responsible lending guidelines will have an impact on the local property sector, especially in the entry level market where aspiring job seekers purchase their first home and for married couples hoping to be able to purchase or upgrade their homes.

Selvaraj urges the central bank to ease the loan application process.
“Depending on location and from state to state, the price ranges from RM150,000 to RM500,000. This is the price range that speculators have been targeting in the past and have artificially inflated such property prices, but it's still too early to gauge the effectiveness or effects of the responsible lending guidelines.

“It is hoped that as property speculators are denied financing to purchase such homes and with only real demand in the picture, the prices of such properties will gradually decline to more realistic prices.”

According to reports, applications for loans for the purpose of purchasing residential properties contracted 6.3% in January from a growth of 11.3% in December 2011.

Yam says Rehda understands that the implementation of the rationale for responsible lending guidelines was due to the large household debts and the 40% increase in transaction value (from RM100bil to RM140bil) between 2010 and 2011.

“On the short to medium term, this restriction would ultimately cause a slowdown in borrowing which is the intended effect, and it will cause a negative effect on home ownership.

“The mixed signal arising from this new lending rule is that while on the one hand the Government is encouraging the building of more affordable medium-cost housing by introducing “My First Home Scheme” and “PR1MA” homes to stimulate demand, on the other we have this Bank Negara announcement,” he says.

Yam feels that the central bank's new lending criteria seems to be in contradiction to the earlier Budget announcement in October last year.

“This does not sit well with developers who are taking the cue and feel positive about home-buyers being offered greater opportunity and various incentives to own homes only to be somewhat dampened by this new requirement,” he says.

Positive measure?

Khong & Jaafar Sdn Bhd managing director Elvin Fernandez says he is supportive of Bank Negara's responsible lending guidelines.

“The new rulings are good because they are pre-emptive measures to prevent a housing bubble. The measures are making themselves felt as price increases in some hot spots that were a cause for concern have now stalled and also the trend from it spreading down the line or to other areas have also been curtailed.

Fernandez supports the guidelines as they prevent a housing bubble.
“House prices rising are not good. Prices rising with fundamentals such as household income and rental returns are good,” he says.

Chang also applauds Bank Negara's responsible lending guidelines.

“The guideline requires the financial services providers (FSPs) to provide assessment of individual affordability and provide suitable and responsible advice to customers on their capacity to take on additional financing,” he says.

According to Chang, the FSPs or banks will be required to undertake a comprehensive assessment on borrowers' sources of income and verify against independent sources to ensure that they have the ability to repay the loans throughout the tenure of the loan.

Income assessment shall be based on the borrowers' net income, which is the gross salary minus the statutory deductions such as Employees Provident Fund contributions and tax deductions.

“HBA has been advocating for a very long time for FSPs to exercise prudence and good judgment when disbursing loans. Due to stiff competition and key performance indicators set by the board and senior management, (FSPs) have been too lenient and aggressive in providing financing, resulting in artificially inflated property prices and many young adults being declared bankrupt due to their inability to repay their debt obligations,” says Chang.

Chang says that as part of the responsible lending guidelines, Bank Negara has repealed its requirement of a maximum debt service ratio (DSR). For the uninitiated, the DSR means that the debt repayments are divided by the borrower's income.

According to him, prior to the responsible lending guidelines, the maximum DSR was set at one-third (or 33%) of gross income for single loan repayments and half (or 50%) of gross income for all loan repayments combined.

The exception was given to civil servants who could borrow from the cooperatives with a DSR of up to 60% of their gross income.
“Hence, if the borrower's gross income is RM3,000, the maximum single loan repayment is RM990 and maximum aggregate of all loan repayments cannot exceed RM1,500 per month,” Chang says.

Under the responsible lending guidelines, the DSR based on gross income has been repealed and FSPs are now free to set their own DSR based on the net income of the borrower.

Chang says the issue now will be that prospective borrowers do not know if they would qualify for a loan as different FSPs have different DSR guidelines.

“There is a shock-effect with FSPs being told to totally disregard all forms of variable income such as discretionary bonuses, commissions and overtime and prospective borrowers that are dependent on these types of income are adversely affected.

“Based on our market sources, some FSPs are willing to consider these types of income but at a discounted rate and this causes great confusion to prospective borrowers as they attempt to shop around for loans,” he says.

Rehda feels the affordable housing segment will probably be the most affected.
 
Chang says HBA is urging the central bank to retain its “maximum DSR” requirement “to set a cap” as guidance for FSPs to follow.

“As it is, even with the previous guidelines on one-third and half, many FSPs have openly flouted the guidelines with reckless financing, resulting in artificially-inflated property prices and many young adults being declared bankrupt due to unmanageable debt levels.

“With the caps removed and FSPs being free to set their own lending policies, the situation of reckless financing may get even worse. Although HBA agrees that market forces are the best form of regulation, it has been shown that we operate in an imperfect market and hence the need to retain DSR limits for FSPs to follow,” he says.

As a means to improve lending, the HBA is also calling on the central bank to issue additional guidelines on the recognition of variable income, where the borrower can show a good track record for such income.

“This is because certain industries such as in the sales and manufacturing sectors, the basic income is often very low and the discretionary income serves as an incentive for employees to perform.

“If such discretionary income is to be totally disregarded, it is feared that such employees may never qualify for any sort of loan from legal channels and end up resorting to loan sharks.”

By EUGENE MAHALINGAM eugenicz@thestar.com.my

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Reining in household debt by Bank Negara Malaysia

The responsible lending guidelines, among the pre-emptive measures by Bank Negara to contain surging household debt, have made a strong impact on most people. Will the guidelines be effective to control the alarming levels of household debt and put the brakes on loan growth? 

THE responsible lending guidelines, which came into effect on Jan 1, created quite a stir in the banking industry with leading indicators signalling further signs of loan growth slowing in the coming months.

There is some discontent among consumers in terms of having their loans approved based on net income compared with gross income previously, in addition to which is the need for more documentation.

Some automotive players and property developers are not too happy either as they feel the move will be a dampener to their business moving forward. Loan growth for January was lower at 12.1% year-on-year (y-o-y), probably the slowest since 2010, compared with 13.6% y-o-y in December last year mainly due to slower growth in the household and business segments.


Total application and approval for loans in January was down almost 3% from a year ago although those disbursed rose by 5.6% y-o-y.

Loans in the household sector, which has a high level of indebtedness, was dragged down by slower growth in auto, mortgage and personal loans. But some quarters argue that this could be attributed to shorter working days in January due to the Lunar New Year break and other holidays.

Officials say that a loan growth in the region of 12% appears to be fine and much stronger growth may be a problem if left unchecked.

Indications are that loan growth to households, which was lower in 2011 than 2010, will normalise in February this year after the dip in January.

Whatever the arguments are, this trend, if it does continue, can be seen by some quarters as worrisome. Will loan growth then continue to slide? Some industry observers and analysts think so.

Loan growth mixed signals

Under the guidelines, banks are, among others, required to apply the net-income calculation method instead of gross income when computing the debt-service ratio for potential borrowers. The lending guidelines cover housing, personal and car loans, credit cards, receivables and loans for the purchase of securities.

Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias says based on indicators, the rating agency feel that loan growth will likely moderate this year to a single-digit figure compared with a 13.6% growth recorded last year.

Nor Zahidi says the stricter guidelines is a step in the right direction.

This is due to the fact that some potential borrowers will no longer be eligible for certain types of loans, he says. This, he adds, is evidenced by a steep drop in the volume of passenger cars sold in January by 25% compared with the same period last year following stricter hire-purchase loan processes.

Total vehicle sales, however, rebounded by 9% in February with industry sales hitting 44,013 units from 40,387 units in February 2011.

Going forward, Zahidi says he foresees further decline in the banking sector loan growth as banks continue to be extra prudent in their lending practices, adding that there are also declines in loan applications for cars, credit card and residential properties based on latest indicators.

Loan applications for purchases of passenger cars contracted by 15.5% in January from 7.8% growth in December 2011. Another significant drop was the application for the amount given to the credit card segment which fell by 50.9% in January from a decline of 10.2% in December 2011. Applications for loans for the purpose of purchasing residential properties contracted 6.3% from a growth of 11.3% in December 2011.

Approvals for loans categorised for “personal uses” declined by 29.8% compared with a 42.4% growth in December 2011 while the amount of loans approved for the purchase of passenger cars and residential properties contracted by 18.4% and 20.9% respectively in January (December 2011: 0.3% and 1.8% respectively).

The Association of Banks in Malaysia (ABM) says the implementation of the guidelines will not have a direct relation to its member banks' loan growth. Factors like global economic conditions and its impact on the regional economy as well as developments on the external and domestic front will be the more pertinent factors that will have an effect on loan growth, it says.

“The guidelines merely set out to better define the expectations of banks to act responsibly and transparently when lending. The policies and practices envisaged are not entirely new as they underscore the existing approach taken by our members. While it will ensure that the debt commitments of individuals and households are within their repayment capabilities, customers who can afford to repay will not be denied access to financing,” it says.

A robust retail finance market, ABM says, cannot be measured by loan growth alone as the obligations (financial and contractual) to repay, sound personal financial management skills and responsible financing practices are more important to the stability and sustainability of the market in the long run.


Weaker numbers

The occurance of non-performing loans and loans in arrears appear to be falling, and they are what bankers and regulators are paying close attention to. That will indicate that the responsible lending guidelines, even though they may crimp the longer-term trend, is not having an impact on the quality of existing loans.

Wong expects loan growth to taper to 8%-9% after clocking in a strong 14% last year.
 
CIMB Research says in one of its notes that it expects a slowdown in loan growth this year due to weaker numbers from all major loan segments including residential mortgages and auto loans.

RHB Research Institute considers that on the whole, the new guidelines will have some impact on household loan growth, but the extent of the impact remains to be seen.

As for demand for loans from the household segment, the research outfit does not think the growth will fall off the cliff, but rather will be at a more moderate pace relative to recent years.

Jupiter Securities head of research Pong Teng Siew feels that with the strict adherence to the lending guidelines, loan growth may hit 8% or less sometime later in the year but may pick up in some months.

OSK Research is maintaining its loan growth projection for this year at 9% despite the guidelines which it says will play a part in slowing loan growth. The projection was underpinned by Economic Transformation Programme (ETP) projects.

RAM Ratings head of financial institution ratings Wong Yin Ching expects loan growth to taper to 8%-9% after clocking in a strong 14% last year.

This, she says, will be supported by expectations of a real gross domestic product growth of 4.6% in 2012 (2011: 5.1%) and a more moderate household loan growth due to various prudential measures introduced since late-2010. Loans growth is said to be correleated to economic growth and with the Government seeing growth to come in at 4%-5% this year, expectations are that the pace of loans given out will accelerate at a slower pace.

Wong says the loan growth will be partly balanced by stronger financing demand from the corporate and commercial sector in anticipation of the rollout of projects under the ETP and 10th Malaysia Plan gaining momentum.

Meanwhile, Maybank IB Research, with a neutral call on the banking sector, says it expects domestic loan growth of 10.5% this year, up from its previous forecast of 9.4%, adding that mortgage lending is expected to hold up better than anticipated.

According to Bank Negara's Financial Stability and Payment Systems Report 2011, the growth of household debt to gross domestic product (GDP) increased last year but the pace was slower with outstanding household debts expanding by 12.5% to 76.6% for the year compared to 2010 when debt grew 13.7% to 75.8%.

It adds that signs of stabilisation in household debt relative to GDP was seen from the second half of last year after a continued upward quarterly trend observed since 2009 with borrowing continuing to be concentrated on residential properties and motor vehicles, which together account for 64% of total household debt.

The report states that bank lending to individuals earning more than RM3,000 per month accounted for about 80% of total loans to households by the banking system.

Choo says the guidelines will not have any adverse impact on those with genuine capacity to repay.
It adds that bank exposure to borrowers with monthly incomes of RM3,00 or less was relatively low representing less than 13% of total banking system loans. “Based on historical experience on the level of impairment and provisioning, any impairment losses to banks are not likely to exceed RM2bil or less than 8% of pre-tax profits of commercial and Islamic banks,” it notes.

The growth in household debts had also been accompanied by a corresponding expansion in household financial assets, it says, adding that stronger growth in household deposits which expanded by 12.2% balanced the slower increase in financial assets.

Timely move?

Despite the brouhaha surrounding the pre-emptive measure, many feel the introduction of the guidelines is timely and justifiable.

RAM's Wong views it as one of the many measures to contain the growth of household debt.

The banking system's household financing has been rising steadily over the last five years and currently constitutes about 55% of the system's total financing, she says, noting that the growth has stemmed mainly from home and personal loans.

As a result, she says, Malaysia's household debt-to-GDP ratio has trended upwards from 69% in 2006 to 77% in 2011. Compared to other countries in the region, this figure is considered high especially when looked at in relation to GDP per capita, she adds.

Some of the other pre-emptive measures which Bank Negara had earlier imposed to control rising household debt include tighter criteria for residential property financing, such as a 70% loan-to-value (LTV) cap on a borrower's third housing loan and beyond, as well as raising the income eligibility criteria for credit cards.

Some analysts concur that the lending guidelines are vital to ensure quality loan growth and some form of control is necessary. With ringgit deposits slowing, analysts expect banks to start pulling back on lending even in the absence of the guidelines.

Zahidi says the guidelines are introduced to ensure that the consumer segment will not be overstretched for too long. While it will take a few years before Malaysia's household debt can be reduced to below 60% of GDP, the stricter guidelines is a step in the right direction, he says.

However, he adds that this will have some adverse effects on the banking sector's loan growth as well as on private consumption.

OCBC Bank (M) Bhd country chief risk officer Choo Yee Kwan says credit assessments under the guidelines are done holistically by taking into account the total debt obligations of an individual borrower and will not have any adverse impact on those with genuine capacity to repay.

At the same time, he says, it will help to deter borrowings for speculative purposes and align debt burden more closely with repayment capacity.

 
Cavale says the long-term impact on banks is yet to be determined.
“While the guidelines are relatively prescriptive on the lending approach, they are really complementary when viewed from the vantage of a bank with more advanced risk assessment tools and portfolio screening and early warning triggers for sustainable loan portfolio health,” Choo explains.

A banking analyst from MIDF Research, on the other hand, thinks that while the guidelines on the whole are good, some details are vague and not properly spelt out. For example, there is no mention of specific details on liability as well as on debt servicing ratio, and is left to individual banks to assess the risk appetite of loan applicants.

Citibank Bhd managing director for cards and consumer lending Anand Cavale feels that while the guidelines will strengthen the control for lending, the long-term impact on banks is yet to be determined.

Although it will help reduce the level of household debt, this will depend on the state of the economy, as household debt is directly linked to the performance of the country's economy, he says.

While the guidelines will strengthen the overall ability to lend prudently, Cavale believes there should be proper infrastructure in place. For example, banks having accessible ways to the customer income information will help the process to implement the guidelines more smoothly, he points out.

Other areas of focus

Some analysts feel the stringent lending guidelines may cause banks to shift their focus to other areas to boost their bottomlines.

The MIDF Research analyst says banks may, for example, look to increase high net worth individuals or affluent customers for their credit cards as in the case of Malayan Banking Bhd. This, he adds, will include cross selling of cards to this segment.

For the mortgage side, banks may look into issuing more financing for landed properties in selected locations and for the auto business, they may source for stronger dealership, the analyst says.


Choo says OCBC Bank's objective is to derive 30% of its income from non-interest income sources, noting that it is keen to diversify and strengthen its deposit base to ensure it is not overly concentrated in any one specific segment.

According to Cavale, it is likely that banks will add other products or services that will support additional streams of income to mitigate potential reductions in the lending area.

Another area which banks are aggressively pursuing currently is the small and medium enterprise (SME) segment. This segment, according to an analyst with an investment bank, will provide better margins and probably make up for the shortfall in slower loan growth from the stringent guidelines.

Those banks which were not focusing on the SME segment will now have to employ strategies to capture this growing segment, he adds.
  
By DALJIT DHESI daljit@thestar.com.my

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