Learning from others, Bank Negara way
It turned out that South Korea plunged into a crisis that year because people got carried away and spent money they did not have. Millions defaulted on their payments, the government had to rescue its biggest credit card company and the economy slowed down significantly.
A crucial aspect of the story is that regulators tried to enforce stricter measures to get a grip on the situation but they were too late.
Without trying to sound too boastful, this is where our central bank, Bank Negara Malaysia, has done well. It has been able to learn from the experience of others and applied the necessary preventive measures.
Last year, after slashing interest rates to a record low of 2 per cent to spur the economy amid a global recession, it quickly raised borrowing costs. Keeping rates too low for too long was one of the reasons that led to the financial crisis in the US.
It was also last year that BNM introduced limits on mortgages for those wishing to buy more than two houses, to curb speculation in the property sector. It was evident that prices in selected locations, the Klang Valley, for instance, were too high. Once again, similar measures were adopted before in countries like Singapore and Hong Kong to cool a red-hot property market. But in fact, BNM was dusting off its old playbook and applied what it had already done way back in the mid-1990s.
Last week, BNM announced new rules, making it harder for people to get a credit card while at the same time capping loan limits and the number of cards they can hold.
Now, we can expect more rules for banks to adopt what is called responsible lending practices. What this means is that banks must carry out tests to see if a person can afford the loan that's being applied for. Banks must also be more forthcoming with information and tell customers how much they have to pay when interest rates go up.
This would happen in cases where a loan comes with a promotional cheap rate that's only for a certain time. Then, the higher rate would kick in, meaning higher monthly payments.
What does it mean to the man in the street? It means that the average Ali will have some measure of protection against taking up loans he cannot afford. It also means the consumer will be better informed.
But the bigger picture is that the country hopefully would be able to head off potential problems with household debts in the future with these measures. This means not having to spend taxpayers' money for bailouts, something that South Korea had to do in 2003. A more recent experience is what the US had to go through with its subprime debt crisis.
The fact remains that household debt, while high, is not a major concern for now because the rate of bad loans has been falling since 2007 to about 2 per cent now.
Also, the bulk of household debt comprises mortgages that use property as security, therefore reducing the risk of losses for lenders.
SOURCE: Business Times
