PETALING JAYA, July 6 — Non-bank financial institutions (NBFIs) that contribute to the country’s soaring household debt must be forced to implement the same prudential measures as commercial banks, several economists have said.

They also called for reduced loan tenures and higher downpayments for cars and houses in tandem with a higher real property gains tax (RPGT) to restrict speculation, noting that skyrocketing property prices underpin Malaysia’s high household debt that hit a whopping 80.5 per cent of the gross domestic product (GDP) last year.

“There needs to be further tightening of the lending by NBFIs and co-operatives,” RAM Holdings chief economist Dr Yeah Kim Leng told The Malay Mail Online in a recent interview.

“They must use net income rather than gross income for their eligibility, in terms of how much they can borrow.

“They must tighten personal credit to define more specifically in terms of what personal credit is used for. For example, housing loan — they must get mortgage loans rather than personal credit to purchase a house,” he added.

Yeah pointed out that personal loans issued by NBFIs were used for a variety of purposes.

“Some could be used for business, financing marriages, all kinds of uses. It does not give us a good picture as to the purpose of the borrowing. So that has been used to bypass some of the restrictions needed to get a loan.”

BNM yesterday announced immediate measures to arrest the country’s soaring household debt problem, including tightening lending procedures by narrowing loan tenures for personal financing and property purchases.

The central bank put a cap on personal loan tenures to 10 years and a maximum of 35 years for the purchase of residential and non-residential properties. Pre-approved personal financing products have also been prohibited.

According to StarBiz yesterday, the new tenures will only apply to loan applications submitted after July 5.

Quoting BNM, the daily reported that the new measures were taken to rein in the steady growth of household debt levels, which have been averaging at 12 per cent annually for the past five years.

Malaysia’s household debt to GDP ratio has been steadily increasing from 75.8 per cent in 2010 to 76.6 per cent in 2011 and to 80.5 per cent in 2012.

BNM recently said it would continue engaging with shareholders and the management of NBFIs, which have been partly credited for the hike in household debts, owing to loose lending criteria and strong growth in personal financing credit.

News portal The Malaysian Reserve reported BNM last March as saying that 80 per cent of personal loans offered by NBFIs, which are not supervised by the central bank, goes to civil servants with household incomes of less than RM3,000 a month.

“Although the risk of the personal finance loans is low, they contribute to household debt and BNM is concerned as such lending makes up the bulk of NBFI lending portfolio and could present a risk in future, as well as contribute to making households overly indebted,” the central bank’s deputy governor Sukhdave Singh was quoted as saying.

Yeah pointed out that some civil servants ran into debt to pay for their children’s weddings or to purchase furniture, besides paying for cars and housing.

“So it creates a concern when lending for productive purposes goes towards excessive consumption; they’re living beyond their means,” he said.

“The credit concern is less given job security in the civil service. Retrenchment is not a concern. But it makes them more vulnerable to the rising cost of living and emergency needs,” the economist added.

The Malay Mail Online reported on Tuesday that civil servants, the usual targets of these NBFIs, are now finding themselves spiralling deeper into debt as more among them opt to take out hefty personal loans to finance their daily needs and indulgences.

Interviews with government workers found many have zero savings to cushion their fall in times of financial emergencies but their loan application approval comes with great ease mainly due to their job security and the easy availability of personal financing offered by the NBFIs.

Yap Hock Chen, manager of seven mobile phone outlets throughout Selangor, said that sales of mobile phones, mostly smartphones, spike by 50 per cent before Hari Raya and Chinese New Year.

But half of the owners trade in their smartphones for basic mobile phones after the festive season.

“They spend a lot of money at the Raya celebration and afterwards trade in their phones for cheaper phones,” Yap told The Malay Mail Online recently.

Economist Wan Suhaimie Saidie from Kenanga Investment Bank similarly said that many Malaysians are trapped by consumerism, leading to debt.

“Everyone wants a smartphone, a car. We become obsessed about things and we spend more than we earn with the availability of credit cards,” Wan Suhaimie told The Malay Mail Online in an interview recently.

“Hari Raya, balik kampung, you want to show off that you have a new car, but you’re paying through your nose. Banks should be more stringent,” added the senior vice-president of research in Kenanga Investment Bank.

He also called for downpayments for cars and houses to be increased to 20 per cent, besides limiting the loan tenures to seven and 30 years respectively.

“The government must also raise the RPGT to restrict speculation to prevent buyers from flipping,” said Wan Suhaimie.

The RPGT was increased last year from 10 to 15 per cent for properties sold in two years, and from five to 10 per cent for those sold from two to five years.

But the House Buyers Association (HBA) reportedly said last September that the RPGT should be hiked up to 30 per cent instead for properties sold in less than two years for the first two properties.

Wan Suhaimie noted that household borrowing grew last year at a rate of 13 per cent, faster than the GDP growth of 5.6 per cent. “Income growth should be higher than household debt growth,” he said.

Suhaimi Ilias, Maybank Investment Bank chief economist, said the introduction of the Financial Services Act (FSA), which will replace the Banking and Financial Institutions Act 1989, will enable the central bank to regulate and supervise NBFIs.

“People who are finding it difficult now to get loans from banks can go to NBFIs for financing, especially personal financing,” he told The Malay Mail Online recently.

Former Malaysian Institute of Economic Research (MIER) executive director Datuk Dr Mohamed Ariff Abdul Kareem said the country’s household debt has reached “dizzy levels”.

“High household debt close to 81 per cent of gross domestic product (GDP) has serious economic implications, as these households spend as much as 60 per cent of their disposable income on principal repayments and interest payments,” Mohamed Ariff told The Malay Mail Online recently.

“There is a need to bring non-bank financial institutions within the ambit of central bank regulatory oversight,” he said.

“At present only a few of these institutions participate in the interbank market or depend on wholesale funding.

“The recent central bank guidelines to commercial banks for tightening household loans might have diverted the source of loans from banks to the non-bank sector.

“Lower prices of houses and cars would certainly be an important part of the solution to the problem.”