Tuesday, July 9, 2013

Get Tough On Personal Loans & Property Loans ... PLUS Revamp Insolvency Laws Please

Bank Negara Malaysia’s (BNM) move last Friday to tighten consumer lending will be negative for loan growth but the impact will not be significant, CIMB said, as it urged investors to hold on to their holdings in banks. The three measures the central bank announced were 1) a maximum tenure of 10 years for personal loans, 2) a maximum tenure of 35 years for property loans, and 3) a ban on pre-approved personal financing products.
In a kind of related newsbite, Nancy Shukri has indicated that changes will be made soon to Insolvency laws, a promise made by Najib back in 2012. Its about time to change these laws as it is not befitting of a developing economy like ours.
While I strongly agree that our personal and property debt should be reined in further, ... we also need to know that there is a highly inequitable treatment of those who fall under bankruptcy in the Malaysian system.
Vivian Hsu no67167

I have written before on the dire need to revamp Malaysia's archaic bankruptcy laws. Let's look at hard facts:

a) Inland Revenue Board CEO Dr Mohd Shukor Mahfar is 'embarrassed' to explain clearer the issue of why five million people in the country who are eligible to pay taxes but only 1.7 million are active taxpayers.

b) As of October 2011, there were 235,908 (probably closer to 300,000 now) individuals who were still declared bankrupt, according to Insolvency Department's Datuk Abdul Karim Abdul Jalil. On average 51 new ones are added everyday.

Take the two together, this is to say that nearly 5% of those working are bankrupts. Yes, I know some are not working. So we are still looking at 1 in 20 of our workforce.

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The trouble with our system is that bankruptcy runs in perpetuity (i.e. almost never ending till you die). Unlike in HK, Singapore and many forward thinking economies where you only have 4 or 5 years to pay down your debt and after that you are free from the debts.

Why is it so important to implement a limited period for bankruptcy?

1) Being bankrupt means you are also literally removing 5% of the working public and 5% of households from participating in the real economy. Cannot do business, cannot get loans, even job hunting may be a problem every now and then.

2) The Malaysian archaic system overly favours the banks and financial lending institutions. When its in perpetuity, the banks can clamp down on you for the rest of your life. We have to make banks and other lenders also responsible for their part in giving out the loans. Look, even creditors to EU give haircut once Greece is in trouble. That is why banks in Malaysia can be so bloody aggressive with credit cards, they know they have a very long recourse to make your life a living hell.

3) The 250,000 figure will jump exponentially soon. Why? Just look at the way they are dishing out the study loans under PTPTN. Look at the surge in personal loans by non bank institutions, look at the aggressive credit card schemes. When you give out RM30,000 or RM40,000 or RM50,000 to someone and their job is only likely to pay them RM2,000 when they graduate, if they graduate, and if they can find a job then, ... you are going to have huge problems. Plus, we haven't got to the credit card users yet.
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4) Even fuckers who end up in jail for a few years and come out, they are free ... not if you are a bankrupt, man, they will drag you till you go to your grave.

5) The onus needs to shift back to the banks and other institutional lenders for a more balanced and equitable solution. For far too long have the banks been operating giddily under such a protective umbrella in their favour. There has to be a fairer distribution of risk for lending and borrowing. I am not suggesting that debtors need not pay, I am saying you need to give them a limited timeline.

6) When you take out 5% of the household from the real economy in perpetuity, it has a lot of indirect repercussions: cannot get study loans for children, making it very difficult to reverse their position as their job prospects may be affected as some companies frown on their status, etc. Needless to say, these 5% will also NOT play a part in the real economy in an effective manner - talk about dropping an anchor on the economy, it weighs heavily especially if its in perpetuity.

7) We have NO UNEMPLOYMENT INSURANCE or other similar SAFETY NETS. If our economy tanks, or the industry we are in tanks, and we are suddenly out of a job ... it becomes very easy for us to spiral swiftly to bankruptcy if you have car loans, housing loans, etc... and no job.

8) Our current laws stifle entrepreneurship. When they try to start businesses, they usually have to take loans, sometimes they will fail, you do not want to punish a risk taker too much by literally barring him/her from ever being an entrepreneur again. We all know that to have a vibrant economy, we need more risk takers, not shut them down the moment they fail. Many successful entrepreneurs will tell you they needed to fail a few times before striking it.

9) It is also precisely these laws that causes many to go for the "ah longs" to make ends meet. No one will resort to these avenues if we have a saner approach to this mess.

10) In HK its automatic discharge after 4 years, in Singapore its 5 years. There are just as many genuine cases as there are people who deliberately do not pay there as in Malaysia. Taking away 5% of the working population from participating in the real economy is a travesty - it has enormous multiplier effects, each person probably affects the livelihood of around 4-8 other younger and older people dependent on that person for financial well being. 

And this is the most important reason of all, we need a KINDER, GENTLER society and government, that embraces all and not excessively punishes some.

p/s I know there will be many who will harp on bigwigs and connected individuals amassing huge loans from government linked banks and government linked financial institutions, and not paying back. That is a separate issue altogether, and should NOT be lumped into what I have written above. Heck, most of these connected people do NOT EVEN EVER get slapped with a bankruptcy notice, so they really do not count - theirs is a matter of poor government governance, lack of accountability, poor or no enforcement, running circles around regulations, the lack of political will to enforce or do the right thing, no checks and balances. So these are TWO related BUT almost entirely separate issues.