New lending guidelines won’t slow growth

THERE may be more forms to fill, disclosure to listen to and information to absorb, but the new responsible lending guidelines is the right direction to go.

Loan growth by banks should not slow noticeably because of the new measures.

The economy is growing nicely and job creation and salary bumps will mean more credit demand.
There will, however, be those who will feel that the checks being put in place is the wrong way to go.
Sure, people will complain that banks will not let them borrow more money even though the potential borrower might feel they can repay their debt.

But the new guidelines serve as a mechanism to keep household debt in check.

Household debt is on the high side at 77.6% of GDP but there is one silver lining. Household liquid assets at the moment is more than sufficient to cover their debt.

The bulk of household debt is held by households with a monthly income of more than RM5,000 a month and although the more you earn would indicate more leeway in dealing with debt, the idea of putting the brakes on household debt is more preventive than anything else.

We have all seen what runaway debt in households can cause. South Korea dealt with it when it went through a credit card crisis in 2003 and in June this year, applied more checks to slow down its own bourgeoning household debt problem which has arguably the highest debt-to-GDP ratio in the developed world.

For Malaysia, the lessons of South Korea is plain to see. The authorities there took action with one eye on the ramification of such a high debt build-up.

Should debt become too high and unmanageable here, it will affect the economy. Let's not go through the obvious scenario where a sharp slowdown in economic growth will spell trouble for households and banks.
Growing debt in itself would naturally crimp on a household's ability to consume and with domestic consumption, where private sector expenditure is a large part of, a big locomotive for the economy, then any danger to it must be managed.

Households should know that when interest rates rise, repayments will go up too. Households which have been accustomed to low interest rates might be feeling that the current low borrowing cost regime might be here to stay but the reality is that nobody knows.

It's likely that interest rates will remain depressed for a long time but it will eventually rise one day and that day of reckoning is something we, the banks and the economy should be cognisant of. (The Star Online)