Financially distressed individuals on the rise


Article from The Edge dated 3 October 2013


AGENSI Kaunseling Dan Pengurusan Kredit's (AKPK) statistics reveal that cases of financially distressed individuals are rising.


In the first half of this year, the agency had already conducted 7,909 sessions of its debt management programme (DMP), for indebted individuals. This compares with the 8,172 cases for the whole of 2007.


Those who seek help from AKPK, do so voluntarily.


"Every morning when I wake up, all I think about is this debt I have to pay off," says a retiree, who is currently seeking help from AKPK.


This is the typical response of those who seek assistance from the agency, which provides advice and assistance to help individual borrowers and potential borrowers to manage their finances and debt. AKPK is a wholly owned subsidiary of Bank Negara Malaysia.


Bank Negara's pre-emptive measures, announced in July to curb rising household debt, have undoubtedly put the issue under the spotlight again. Household debt has risen at a worrying pace, over the last four years. In 2009, it was 70% of GDP. Four years later, it has crept up to 83%.


According to the central bank, household debt grew at an average annual rate of 12%, over the last five years. It notes that while this has been supported by positive income and employment conditions, there has also been a growing number of financial products that are not in the long-term interests of consumers.


"This includes extended financing tenures of upto 45 years for house financing, and 25 years for personal financing. While this may reduce the monthly repayments, in the long run, this increases the overall debt burden of households. Such practices encourage excessive debt accumulation by households, and increase the vulnerability of this sector," Bank Negara says in a recent press release.


According to Koid Swee Lian, the CEO of AKPK, there is a rising trend of indebtedness, for those with families and who are above the age of 40. "It is those who are with families [that are indebted]. If you observe the statistics for 2012, 47% of those who enrolled in DMP are those above the age of 40. Well, if you start with a 45-year loan for a house in your twenties, it doesn't go away when you are in your forties. On top of that, you accumulate a personal loan and a car loan. All these loans take a long time to settle," says Koid.


"Even when the housing loan is stretched to 45 years, there are many who can't cope with it. We had one person who was in her thirties, in such a situation. The individual ended up using some of her EPF money to repay the debts. But the thing is, people don't realise how important that pool of money is, for retirement."


Koid highlights that the main culprit of this indebtedness, is the cumulative effect of multiple loans. The situation escalates when these individuals are charged with massive interest for late payments, she adds.


The agency points out that those who seek its help, usually have a number of loans — hire purchase, housing loan and credit card debt. These make up 83% of the total number of cases. Meanwhile, indebtedness owing to any of these: term loans, personal loans or share margin financing, comes in second at 9.39%.


"We have also encountered people who take personal loans to invest. They think that a particular investment can give guaranteed returns, but they forget that the current interest rates on their personal loan may not stay [at that level]. If the interest rate goes up, can you still make money? People tend to only look at the reward, but not the risk," Koid says.


One of the agency's biggest cases involved an individual who owed some RM1.5 million, due to a combination of credit card debt, personal loans and secured loans. Based on AKPK's latest update, the individual has yet to pay off his debts.


It is worth noting that a large number of those who seek AKPK's help, are those who earn less than RM3,000 per month — the lower income group. In 2012, 56% of the DMP cases were from the lower income group.


The bulk of enrolment for the DMP, consists of those from the private sector, totalling 35%, while civil servants make up only 8%. However, just because civil servants make up a small number of the cases, it does not mean they are insulated from the dangers. A national school principal, who declines to be named, says that before Bank Negara imposed its responsible lending guidelines in January last year, many teachers were taking up personal loans of RM30,000 to RM100,000.


"Most of them try to take the maximum level allowed, which is upto 60% of their income, under the salary deduction scheme. They usually take a personal loan to finance land purchases, house renovations, marriages, and sometimes, even house purchases," he says.


"Teachers who are new to the profession, make about RM3,000 per month, including allowances. If they take on a loan that deducts upto 60% of their salary for repayments, it's obvious that it will be difficult to get by, on the remaining 40%."


Meanwhile, bankruptcy cases are on the rise. In 2012, the number of insolvency cases rose 2.1% to 19,575. The 2012 annual report by the legal affairs division of the Prime Minister's Department, highlights that the majority of insolvency cases were due to car and home purchases, at 27% each, while 17% were due to personal loans.


It should be noted that only 3,737 DMP cases successfully complete the programme. This is just 4% of the total 92,011 cases, from 2007 to June 30 this year.


As bleak as the situation may look, Koid says the numbers indicate that the younger generation is wising up. In 2012, the number of people under the DMP aged between 20 and 30 years old, fell 19.7% to 1,885 cases.


"The statistics show that the number of people between the age of 20 and 30 years old, have reduced year-on-year. We like to think that the younger generation is better at getting information [on debt issues]. This is good progress," Koid says.