Bank Negara to set new rules in car loans?

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So everyone is talking about the rumored 7-year-maximum loan tenure (instead of 9 years) and buyers need to fork out at least 20% deposit and banks can only give a maximum of 80% loan effective 1st September 2013. So far, it’s all just talk with no visual evidence of it being official …. mainly I heard from a friend who’s a friend who’s aunt works at a bank. At all articles seem to point to a source indicating it originated from sales advisors, not banks and repostings seem to be a simple cut and paste with no change to the words used. The message advises people who intends to buy a  car soon to purchase it within August.

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At the point of writing, this piece of news is as certain as someone in the streets giving you 4 digits to buy the winning 4-ekor but IF this rumor is true, what are the implications to us? No one would know for certain until September comes closer and given the fact that it’s no secret that there is a rising number of non-performing loans (NPL) and threat of inflation, it’s not surprising that the central bank may step in to deal with such issues. With the national household debt ratio to gross domestic product (GDP) at 83%, things aren’t so rosy as before and among that debt, the second highest is car loans (RM145bil as of April 2013. Source HERE). While it can be argued that houses and vehicles are necessities if one were to live in Malaysia, I’ve seen more than my fair share of people who, despite their meager income elect to buy luxury branded cars, only to default in their loan a couple of months later. Some are fresh graduates where their first car is a continental hatchback which takes up more than half their salary to pay.

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It wasn’t the first time Bank Negara has implemented policies to curb excess spending. Early 2012 saw an amendment in the Hire Purchase Act which temporarily affected car sales. Prior to the change, if one were to apply for a car loan, the following requirements are observed:-

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1) Central Credit Reference Information System (CCRIS), FIS and CTOS checking.

2) Individual Banks Credit Risk Scoring, which include but are not limited to the following:

i) The Customer’s historical financial payment track record (any outstanding payment).
ii) The dealer’s historical customer non-performing loan percentages or fraud cases
iii) The vehicle model and type historical non-performing loan percentage
iv) Applicant’s other financial commitment (financial exposure)
v) Applicant’s lifestyle (rented house, mortgage, stay with parent)
vi) Applicant’s employer’s background (its paid-up capital, years of establishment etc)

3) Applicant’s salary (rule of thumb: salary is 3x higher than the HP loan monthly repayment).

4) Documents required includes but not limited to:

i) 3 months payslip
ii) 3 months bank statements
iii) EPF statements
iv) Proof of address
v) Copy of identity card
vi) Copy of driving license
viii) Appointment letter (or confirmation letter)

5) Guarantor’s documents as per para 4 will be prepared if the applicant’s income is less than 3x of the HP loan monthly repayment.

6) Banks have some discretion in approving customer’s loan application bearing the credit risk scoring.

With the above requirements, the average duration for approval took a minimum of 3-5 working days and the overall approval rate already stands at a critical 50% of total submission, with at least 25% of the loan was approved at a lower percentage (loan amount was reduced).

IMPACT ON THE BNM GUIDELINES IMPLEMENTATION:

Since January 1 2012, all banks interpreted the guidelines differently and practice different measures in approving vehicle loan application but the new Rule of Thumb especially for Proton car buyers includes all the six factors above and the following unwritten-terms:

1) Gross income of at least RM1,600 per month.

2) or Net income MUST BE RM800 or more. Net income meaning, gross income less EPF and any other loan exposure with banks.

3) Bank statement of at least six months (BNM GL: Para 6.11 and 6.12)

4) No discretionary approval; any applications that does not conform to the requirement are rejected without processing. Since the implementation of the guidelines, banks do not seem to have any flexibility in approving loans.

5) Customer has lost all sovereignty in exercising his/her right to apply for any car loan unless they comply to the Debt Service Ratio (DSR) of the BNM Guidelines. This directly impacts the majority of the national car buyer demographic.

6) A car buyer can only qualify to secure a loan if he/she passes the DSR that totals up all outstanding debts repayment obligations from banks and non-banks (eg cooperatives, building societies, credit companies, and merchants that provide credit sales) against its income after statutory deductions (ie. tax, EPF, SOCSO) (BNM GL Para 6.6)

7) 6 months proof of salary is required for applicants with high ‘variable income.’ Overtime includes overtime, allowances and commission.

 

(Source taken from Paultan’s article HERE)

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With NETT income being used to determine one’s eligibility to get a car loan, manufacturers like Proton was screaming foul as it severely affected their sales due a high 70% rejection rate once the banks follow the new guideline then. This goes to show that most of us buys a Proton because we couldn’t afford a better car and with only 30% loan approval in the first month after the amendment comes into effect, many Malaysians simply cannot even afford the cheapest cars available. The sad truth of the disparity between the high cost of car prices and household income is very apparent.

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Coming back to our rumor, the initial response of many Malaysians seem to welcome the move (if it is true), saying we’ll then:-

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• Enjoy better traffic flow as the number of new cars will drop
• Reduce the household debt and forcing people to truly spend within their means. If you cannot afford the car, don’t go and kuk (force) yourself every month like you do every morning in the toilet
• Minimize the number of Malaysians who’re stuck with a car who’s value is as much a as dirt at the end of 9 years. I’ve known people who got a lemon car but cannot sell because cannot afford anything else thanks to the 9 year loan. Those times it’s a good thing I didn’t have a gun otherwise I would have blasted his brains out since he didn’t use it anyway when applying for the loan.
• Promote people to buy what they truly need. If the primary purpose of a car is to ferry the family of 4 comfortably from Point A to Point B, a Proton Saga SV does this as well as a VW Polo sedan. And if not the Proton, there are tons of 2nd hand vehicles out there.
• Less loan, less household debt. Let’s face it; downpayment is the hardest thing most of us have to fork out when buying a car or a house. Once a while windfall like bonus, commission, etc might make us think, hey, I can make that 10% downpayment for that new car. With most of us listening to our heart more than our brains when buying a vehicle, the long term implications of a large loan + long repayment is often lost amidst the picture of  flashing your new car to your insufferable and envious neighbor. Come warranty period over and maintenance of the car becomes heavy, people struggle …. pray there’s no component that needs to be changed out of warranty. Bad enough that 17″ tires costs a whole lot more than regular 15″ to change (those thinking of a certain new Proton model should take note)
• the death of progressive car loans (step-up loan) where first few years the repayment is lower compared to final few years. To make the monthly repayment look lower, the repayment period is extended to 9 years. Argument is fresh grad salary will following years but seriously, the quality of life for that grad will remain as low as year 1 considering the ever-increasing inflation rate and earlier mentioned cost of living if the increment in income is not proportionate.

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The list goes on and for those of us who does not have an immediate need, it’s quite easy for us to praise such a policy. However, there’s always two sides of a coin and IF this amendment is put into place, we can probably see:-

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• Proton and Perodua sales takes a plunge (quite a number of Malaysians would actually rejoice at this). The affordably priced vehicles targeting low income earners would be severely affected. Due the rising cost of living (electricity, food, etc) and lack of salary increase, more funds are diverted each month towards bare essentials instead of cars. Motorcycles might see an increase in sales, though.
• Sales of luxury marques will not be that much affected by the increase. If you want it, high income earners will have a way to get it.
• Japanese and Korean sector sales targeting middle income earners will be more adversely hit compared to the luxury segment but not as bad as national car makers.
• Associations like Proton Edar Dealers Association Malaysia (PEDA) will repeat what it did last year saying growth of the automotive sector would be hindered, manufacturing plants like those in Tg Malim, Pekan, Gurun, Ayer Keroh would be affected, thousands of employees directly and indirectly related to the automotive sector stand to lose their jobs, the children won’t have food to eat, the future of the country affected and Doomsday by year end.
• 2nd hand car market sees a boom
• Less income for country as a result of decline in sales of new vehicles.
• Car manufacturers coming up with more schemes that focuses on addressing the 20% deposit requirement (main setback). If this issue is addressed, the lower 80% loan is easier to kau-tim

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Bank Negara has since issued a statement denying such allegations and no memos has been issued to banks but who knows … if Malaysians themselves feel it’s good, why not?

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What say you? Yay or Nay?