Article in The Edge, 19 May 2014
KUALA LUMPUR: The number of individuals declared bankrupt rose a staggering 32% year-on-year (y-o-y) in the first quarter (1Q14) to about 6,480 cases, raising the question of whether the rising cost of living is pushing ever more past the breaking point.
There were about 4,910 bankruptcy cases registered in the first quarter last year, according to the Legal Affairs Division’s 2013 annual report.
The statistic for 1Q14 translates into about 72 cases per day, up from 55 in 1Q13, which recorded a much smaller 7.6% rise in new bankruptcies compared with 1Q12.
Bankruptcies due to default on hire purchase loans increased 48% y-o-y in 1Q14 to 1,906 cases, Nancy Shukri, the de facto law minister, told The Edge Financial Daily. This appears to correspond with the considerable rise in impaired passenger vehicle loans since last October, peaking at RM2.04 billion in February, the highest level since 2009.
Bankruptcies registered due to default on housing loans grew 16% to 1,176 cases.
It was earlier reported that new bankruptcies for the whole of 2013 rose an alarming 12.3% from a year earlier to a high of 60 cases per day. Such a sharp increase is rarely seen in non-recession years. In 2011 and 2012, for example, new cases grew by only 5.8% and 2.1%, respectively.
“The highest [rise in] new bankruptcy cases was registered in 2009 [by 17.1%], believed to be a result of the economic downturn,” said Nancy.
The triggers for last year and this first quarter, however, are not immediately clear as the economy appears to be relatively healthy.
Nancy said “We do not have the relevant information on what causes these defaults.”
The defaults are more likely to be due to shocks to the expenditure side than the income side. The Credit Counselling and Debt Management Agency (AKPK), which provides financial management advice and debt management programmes, says 60.7% of individuals coming through its doors have expenditure-related concerns, mainly due to poor financial planning, high medical expenses, and a loss of control on the use of credit cards.
“We can only speculate that the high inflation rate was one of the contributing factors in the increase of bankruptcy cases from year 2013 to year 2014, among other reasons,” Nancy said.
Inflation, which results in higher living costs, has steadily risen since subsidy cuts began last September. In March, the consumer price index went up 3.48% compared with 2.57% in September. Inflation prior to the subsidy cut in September stood at 1.9%.
After falling for 16 months, credit card balances overdue by at least three months had started picking up again last December.
Vehicle hire purchase loans, which made up the largest cause of bankruptcy last year at 29% of all cases, are commonly the first to bear the brunt of shocks to the economy.
“The hirer or borrower of a hire purchase loan can be made bankrupt in a short period due to an expeditious loan recovery process,” said Koid Swee Lian, chief executive officer of AKPK.
Koid added that hire purchase loans can be problematic because borrowers may not have considered the extra expenses for owning a car.
Meanwhile, Nancy also said that the greater demand and availability of loans are another possible factor.
Dr Yeah Kim Leng, dean of school of business, Malaysia University of Science and Technology, said cheap credit over the past several years has led to rising bankruptcies.
“The low interest rate environment and the push by competitive banks to obtain customers have led to a rapid rise in loans,” he said, adding that the rise in bankruptcies is an early sign of financial distress.
From 2010 to 2013, total loans increased 55%, while from 2005 to 2008, it went up only 41%. This is despite the fact that income per capita grew twice as fast in 2005 to 2008. Consequently, household debt has risen from 72.4% of gross domestic product in 2009 to 86.8% in 2013, one of the highest in the Asia-Pacific.
Yeah cautions that near-term risks to the pace of bankruptcies include inflation, a correction in property prices, and an interest rate hike.
Yeah, however, expects a slowdown in the property market rather than a correction.
Housing loans, which have grown at twice the rate of all loans since 2009, have also grown the fastest as a cause of bankruptcy over the same period, by five fold. Such loans account for 25% of all bankruptcies in 2013, up from 7% in 2009.
Rising living costs and mounting household debts have also lifted the bankruptcy rate in Singapore by 14% to 1,992 cases last year — the highest level since 2009.