Debt Collection Must Be Regulated

The country’s household debt is high at 88% of the Gross National Product and with an average debt repayment ratio of around 44% (that means that 44% of the income goes to settling debts) Furthermore, as many as 55 people on average being declared bankrupt every day.

That means that many people have been unable or may soon be unable to pay their monthly instalments. With so many Malaysians in debts it makes sense to regulate the debt collection business.

 

Bank Negara has come up with a circular on Fair Debt Collection Practices to protect defaulting borrowers. The circular is a comprehensive and commendable but it applies only to institutions that come under the supervision of Bank Negara.

Thus debt collectors have a free hand; Debtors have been harassed at ungodly hours and “served” with letters that threatened to have them “arrested” if the debt is not paid up.

Regulation will lay down the standards that are expected of those involved in the collection of consumer credit debts. It should cover the following:-

Licensing

Regulating debt collectors starts with licensing. The licence should be renewed annually so that unscrupulous debt collectors can be weeded out. Those who break the law will be subjected to fines and have their licenses revoked

Prohibited practices

Debt collectors may not harass or mislead the debtors.

To prevent physical or psychological harassment, debtors cannot be contacted at unreasonable hours or with unreasonable frequency, be publicly embarrassed or subjected to physical threats or harm.

False misrepresentation of legal authority should be an offence. Debt collectors have been known to falsely imply that court action can or will be taken against the debtor when they are in no position to do so. Most debtors are unaware that without a court judgment, such court proceedings are not possible. Often the debtor is frightened by the legalese used in the letter

Debt collectors should not mislead debtors by pursuing a debt which is already statute barred. (I.e. the debt is more than 6 years old cannot be recovered though there are exceptions to the case.)

Evidence of Debt

When existence of the debt is being disputed no action should be taken to recover the debt until prove of its existence is provided.

Each letter demanding payment should give details about the amount owed after the last payment and the interest charged since then. Debtors may admit that they owe money but dispute the sum involved.

Costs

Charges for debt recovery should be reasonable and there should be a limit on the maximum charges that can be levied. Unless it has been so stated in the credit agreement, the debtor cannot be held liable for the recovery charges.

Credit rating agencies

Finally companies should not be allowed to provide names of debtors to any credit reference agency. This is sneaky and unfair method of forcing debtors to pay up loans that could be statute barred or too small to pursue in court. Debtors are “blackmailed; into settling the sum purported owed in their credit report if they are in a hurry to get their new loans approved

Only with legislation on debt collection can debtors get fair treatment.

 

 

Press statement, 25 June 2015

 

Household debt in Malaysia – Is it sustainable?

altAccording to the Bank Negara’s Annual Report 2010, Malaysia’s household debt at end of 2010 was RM 581 billion or 76% of GDP (Gross Domestic Product). The Bank claimed that the household debt is still manageable because of income growth, high levels of savings and favourable employment opportunities.

However, if we look at household debt from the point of disposable income then the picture painted is worrisome because it reveals that households are spending about half of their income to pay off their debts.

Where household debt is concerned, the ratio of household debt to household disposable income and the debt service ratio (the ratio of the debt payments to disposal income), are more accurate indicators of household debt sustainability because the ability to service debt is directly related to disposable income rather than to GDP.

Household Debt Service Ratio

Generally a  debt service ratio of 30% is acceptable, i.e. one third of a household income is used to pay off debt (principal and interest). However, the Malaysian household debt service ratio was 9.1% in 2006, rose to  49.0% in 2009 and dropped slightly to 47.8% in 2010. This means that on average almost half of a household’s income goes to repaying debts.  Thus after paying off the debt there is not much left to spend on food, transport, education, and for emergencies. Should the breadwinner fall sick or lose his job, the family will find it hard to make ends meet and loans may be defaulted.

Household Debt to Disposable Income

altLooking at the problem from the ratio of household debt to disposable income, this ratio is 140.4 % for Malaysia, one of the highest in the world; above that of Singapore at 105.3 %, USA at 123.3 % and Thailand at 52.7% in 2009. This means that the loans taken by each household in Malaysia is on average 1.4 times more than its household income.  

Since both the household debt service ratio and the household debt to disposable income are average figures, in reality it will be those in the lower income group who are at greater risk of not being able to pay off the monthly installments.

Spending using borrowed funds can boost economic growth but it can also slow the economy when households are forced to restrain spending in order to service their loans. Thus there are unfavourable policy implications and economic impact when household debt keeps rising.

Policy Implications of Rising Household Debt

First, it restricts the government’s monetary policy.  Low interest rates have led to substantial increase in housing loans and house prices beyond sustainable levels. House prices to household incomes in major cities of Malaysia have over-stretched the debt servicing capacity of the average household. Should government increase interest rate, it would add further burden to their debt servicing ability.

Secondly, the growth in personal consumption driven by debt, rather than by income growth, is not sustainable and will be derailed with an increase in interest rates and inflation. Between 2005 and 2009, annual growth in personal consumption (7.7%) and household debt (7.1%) has been faster than GDP growth (5.4%).  In 2010, household debt rose by 12.5% whilst GDP growth was 7.2%. Therefore, unless there is a rise in productivity, wages, and household incomes, this trend is not sustainable and can end up in a debt bubble like what happened in the U.S. Between 1975 and 2007, despite rising productivity, average wage stagnated causing a divergence between the two in the U.S. During the same period, personal consumption grew supported by significant rise in household debt that reached 100% of GDP. This created a debt bubble that finally imploded in 2007.

Thirdly whilst today’s non- performing loan ratio is low at 2.3%, Bank Negara should not take too much comfort in this. This ratio can easily balloon when interest rates rise and growth falters leading to household insolvency.

The government’s efforts to curb the problem of rising household debt should therefore be directed to those sectors that make up the most debt.

Composition of Household Debt

The biggest portion of the Malaysian household debt goes to paying off housing loans followed by passenger car loans, personal use, securities purchase, and credit cards.
Malaysians take on increasing amount of housing loans because of rising house prices, low or negative interest rates, and speculative activities. Banks and other financial institutions have encouraged borrowing by offering low down-payment, some as low as 5% of the value of the property, while developers provide marketing incentives in the form of payment of certain transaction costs and interest- “free” financing during the construction period.

There are strong indicators to suggest that house prices and ability to service housing loans have been overstretched in Malaysia. A ratio of house price to household income of 3 to 4 times is internationally acceptable but this ratio has risen to over 6 times and over 8 times in Kuala Lumpur and Penang island respectively.

Next to housing loans, car loans form the second largest category of household loans. This is due to Malaysia’s misguided national car policy encouraging car ownership, to support Proton at the expense of a good public transport system. As a result, ordinary Malaysians are burdened with significant car loans that consume a large part of their income. In fact, car loans are stretched over a long period to enable borrowers to pay off their loans, such that the cars become obsolete no sooner when the loans are fully repaid.

Recommendations

Thus the government needs to:-

• Start a public housing policy that provides affordable housing, particularly in urban areas, to people below a certain level of income. Tighten mortgage rules to cool the property market by, for example, increasing the minimum down payment; reducing the maximum term of the housing loan, and increasing capital gains tax to discourage speculation.
• Tighten the rules for car loans by, for example, increasing the deposit and reducing the term of the loan. Implement a  first class public transport system to reduce dependence on private transport
• Stop advertisements for loans and credit cards that are not transparent about the costs involved, thus seducing consumers to sign up for them.

Finally, we are also equally worried about the social consequences on families having high household debts. They can lead to stress, depression, mental problem, suicides and may cause family break-ups

Getting a grip of the loan shark problems

ah-longWe are all aware of the havoc Ah Longs have wrecked in the lives of the families where one of its member was unfortunate enough to have borrowed money from the Ah Longs.

How many more suicides, how many borrowers have to be disowned by their families before government takes the Ah Long problem seriously? We cannot take the attitude that these people should have known better than to borrow from Ah Longs.
 

With their high interest rates, and unsavoury reputation, those who chose to borrow from the Ah Longs can only be said to be desperate.
 
What was the cause of their desperation?

People who seek out the loan sharks are mostly gamblers and small traders.  As compulsive gamblers and petty business are mostly the ones who approach the Ah Longs, government must turn its attention to these two groups of people in order to solve the problem of Ah Longs.

The gamblers

Yes, gambling has taken a firm foothold in Malaysia.  Popular are bets on international and local football matches. Housewives put down a couple of ringgit each day to bet on the illegal numbers market.  Toto, 4D, Magnum have become household names.  Even children have become experts in buying the betting tickets from illegal syndicates for their parents

According to Michael Chong, MCA’s public services and complaints bureau chairman, about 80% of the borowers who have defaulted on their loans are habitual gambler. The Ah Longs are the only ones who are willing to fund their gambling addiction.  

If follows that to overcome the Ah Long problem, action must be taken to tackle the gambling menace. Government should take the following into consideration:-

a) Gambling syndicates

In 2004 it was said that illegal syndicates were taking about six million ringgit on bets on each match day during the football season.  (Utusan Malaysia 14.6.2004).

Therefore the police must constantly carry out raids especially during the football season so that it will be harder for the syndicates to operate.

b) Profitability

Government needs to make gambling a less profitable business to run and at the same time make gambling winnings less attractive.

Duties and gaming tax on every form of gambling should be increased significantly so that it less profitable to be involved in gambling either as an organizer or a punter.

c) Gambling venues

Even though the four digit forecast ore Sports Toto are not  likely to be the cause of gamblers seeking out the  Ah Longs they may be the start of the gambling bug.

Therefore there is a need to reduce the number of gambling venues. The fewer venues make it less convenient to place a bet.  This must be reinforced by going after the illegal forecast syndicates.

Having many outlets doting all over town also gives gambling the respectability that it does not receive.

Even though we have only one casino in Malaysia it is already one too many.  There are also ship cruises that go no where and whose aim is to allow gambling in international waters.

d) Campaign

Have a campaign to highlight the evils of gambling. Gambling should be seen as an unhealthy habit like drugs and smoking.   This is to discourage the young ones to become compulsive gamblers.

According to the National University of Singapore sociology researcher, Mr. Ho Teck Hua  , gambling is a tough , incremental habit to battle.  Gambling addict has no control over their habits.  They keep doubling up to try to win back what they’ve lost, and in the end they usually just lose more.   Thus he recommended that a more effective way to tackle the problem might be to try and prevent the addiction in the first place.  (Values or Casino? – Tan Soo San)

e) Counseling

It is also time to owe up to the fact that it is very hard for compulsive gamblers to quit gambling on their own.  The gamblers go back to their old ways even though they did not want to hurt the families.

Just as there is help extended to drug addicts and smokers to kick there habit, there should also be one for gamblers.  

Non-gambling loans

When loans are hard to come by for the small business or petty traders, the Ah Longs are the ones that they turn to.

Those who take loans from the Ah Longs will find it hard to break the poverty circle as the profit they make will be used to pay back the Ah Longs.

It is important to break the vicious circle so that the hawker’s or petty trader’s position will improve economically.

As such there is a need to make such loans easily available and affordable.  They process of applying for such a loan should be simple with as little red tape as possible.

With the down turn in the economy even professional are using the services of the Ah Longs.

According to one Ah Long, it used to be that a majority of  his borrowers were  those with gabling debts  However lately, about half of his customers are professionals that include doctors, lawyers and even company chief executive officers. These are the people who live beyond their means and have huge commitments. After being blacklisted by the banks for unpaid debts, they too are forced to seek out the Ah Longs (New Straits Times 29-10-08)

The situation is going to get worse as the current economic downturn worsens.  

Thus there is need to caution the public about over spending on   purchases which they cannot afford.

Conclusion 

The problem of Ah Longs can be solved by a three prong approach.

Firstly, the government must send a clear warning to the public that it does not support the gambling habit as gamblers may end up as victims of Ah Longs. It must therefore reduce the number of legalized gambling venues and reduce the number of draws per week.

Secondly, it should also recognize the fact that if it wants to help the poor break from the poverty cycle, it has no choice but to make cheap loans available to petty traders and those in small industries.

Lastly it should come down hard on the illegal gambling syndicates and the Ah Longs.  Getting to the Ah Longs is not difficult as their advertisements are all over town.

 

The twin problem of loan sharks and gambling

For the compulsive gambler, gambling is an addiction and when he has a craving for it, nothing else matters.  The gambler is so consumed by his addiction t that he cannot break from it though he knows that he is hurting his family. When his money runs out he takes loans from the Ah Longs to feed his addiction.
That is why even when the family has paid thousands of ringgit to get the Ah Longs off the gambler’s back, he will revert to his gambling ways. When the parents cannot take the harassment from the loan sharks, they will have to publicly disown him. Thus it is the family that has to suffer for the gambler’s folly.

In Singapore, 20% of families being counseled by the Ministry are due to gambling-related problems.  7% of suicides are also due to loan shark problems usually related to gambling. Furthermore, most addicted gamblers have problems saving or providing financial and emotional security for their families.  They are also prone to job-hopping or unemployment. (Values or Casino? – Tan Soo San)

It is most sad when the families have to pay for the gambler’s folly with their lives.

Gamblers have been known to take the lives of other members of the family in the mistaken belief that they will also be better off dead.

As the problems of compulsive gambling and Ah Longs are intertwined, successful handling of  the gambling problem will also help to reduce the Ah Long problem.

 

Victims of the Ah Long scourge

It is nothing new to read in the papers about a house been splashed with red paint by Ah Longs or a parent tearfully and publicly disowning a son in the hope that the Ah Longs will leave the rest of the family alone. Now and then an Ah Long victim may take his own life as  it is the only way to escape.
 
Case I

A farm manager drank weed killer after incurring a RM90,000 gaming loss as a result of  betting on the Euro 2008.  He left behind a wife and 4 young children.  According to his father he had earlier given more than RM1 million to pay of his son’s debts. (The Star 26.6.08)

Case 2

A man who had jumped out of the Gentling Highlands Hotel Restaurant window was saved by the Gentling Skyway safety net.  He had tried to commit suicide as he was deep in debt to the loan sharks. (The Star 9.4.08)

Case 3

A lawyer went missing in July after being hounded by 31 loan sharks came forward to tell his side of the story.  He said his troubles began when he borrowed RM30,000 for a friend.  When the loan was not serviced he borrowed another RM100,000 from the  loan sharks He said that even though he had paid most of the money with an interest rate of RM5,000 per day his debts is now more than RM300,000.  

Unable to take the daily harassment and threatening calls, he had sought protection from gangsters.  It only worsens his problem when the gangsters allegedly demanded RM50, 000 for their services.

His wife had also earlier lodged several police report on the loan sharks who were harassing her after he disappeared.   The loan sharks had splashed paint on her car and house and even pasted offensive poster and photocopies of the husband’s identity card on the gates of the house.   (The Star 15.8.08)

Case 4

Threats by loan sharks are believe to have driven a borrower to slit his wrist and set his house on fire a in a suicide bid. The borrower’s brother had also received a threatening note in his office asking that the  RM160,000 be settled.  (The Star 13.8.08)

Case 5

A 70 year old mother publicly announced that she was severing ties with her  second young son (known to be a gambler) when loan sharks started to harass her. The loan sharks had splashed paint on the walls of her house.  Three loan sharks had demanded that the mother paid up the debts amounting to RM50,000. (The Star 25.9.08)