Ahad, Mac 27, 2011

Keeping debt within means

CREDIT cards are a paradox. On the one hand, they make for an increase in consumption by affording to many a useful, temporary add-on to disposable income. It also allows for economic expansion. On the other, the payback can get ugly for the few who are either bad managers of their personal finances or whose static incomes are just too small and should never have been extended the facility in the first place. Rightly, this latter group is being denied access to credit cards by Bank Negara. The new guidelines to lenders upped the floor for credit card holders from a monthly income of RM1,500 to RM2,000, a regulation intended to curb unmanageable household debts.
Malaysians have a penchant for borrowing, as shown from the country's ratio of household debt to personal disposable income. We are tempted to borrow more than we earn and that demands of the borrower an astuteness in balancing personal cashflows. A low, inflexible income makes loans unaffordable under most circumstances. In fact, extending any loan to someone on an income that cannot support the loan spells trouble, as the subprime mortgage debacle of 2008 in America demonstrated. When banks and other institutions lend to those who do not, for one reason or another, qualify, the debt bubble created poses a serious danger to the greater economy, one made worse by financial innovations such as, in this instance, mortgage-backed securities. Note, too, that what started then is not yet over three years later.

The endgame of greed on the part of lenders is what drives their bad risk management practices and as the American experience suggests, under-regulation of the financial sector is imprudent. To expect self-regulation in an industry that can spin profits any which way is a recipe for disaster. The seemingly increased availability of credit created by financial instruments such as subprime loans is illusory at best and delusional at worst. While increasing the consumer base does indeed make for growth, its soundness depends on good risk management by lending institutions. Of course, the assumption is that nobody wishes to be a bankrupt, a threat that must surely produce good borrowers. There is, to some extent, truth in this as demonstrated by the comparatively small percentage of credit card defaulters. Nevertheless, borrowers can also be ill-informed, misguided and inclined to throw caution to the winds. Given that the impact on banks is likely to be minimal, there is no reason for complaint and every reason to welcome this initiative.

2bz4money: Learn not only to be a good borrower but smart..

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