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Saturday, March 3, 2012

Bank Negara’s lending guideline is a blessing in disguise

ENVIRONMENTALISTS and green champions must be applauding the lower number of cars that have been sold since Bank Negara's latest directive to banks to disburse the quantum of household loan based on a borrower's net income instead of gross income.

Since Jan 1, banks have to use net income instead of gross income to calculate the debt service ratio for loans. The guideline covers housing, personal and car loans, credit cards, receivables and loans for the purchase of securities.

The effectiveness of the ruling can be seen in the lower number of vehicles sold in January. At 40,948 units, it was 14% lower than in December 2011 and a 25% drop against January last year.

This goes to show that many of those who previously managed to sign up for new car loans and other types of consumer loans could be grossly over-geared and may have inadequate disposable household income. What's left of one's income after deducting payment for loan servicing, income tax and contribution to the Employees Provident Fund, differs from individual to individual, depending on one's financial commitment.

Don't forget that for many sole breadwinners, they also have to shoulder a host of other payments - spouse and children's household expenses and education fees, pocket money to ageing parents and dependents, and other miscellaneous expenses. The list goes on.

The central bank has good reasons to rein in the rising ratio of household loan to income as the benefits are manifold.

The measure should be applauded as I believe the right policy is the first step to steer people in the right direction of living within their means rather than allowing them to become dependent on debts to maintain their lifestyle.

With the prevailing uncertainties in the world today, it is a good time for families to consolidate their household income and expenses account. And along the way they can point out to their young ones about the virtues of being contented with what they have.

Instead of rushing to place booking for a new car whenever a new model comes out, it is nothing wrong to drive around in an older model as long as the vehicle is road worthy.

Don't forget that our young ones are always watching us, the adults, as their role model. In many ways, they are a mirror of what we are, so it is important for us to watch our thoughts, words and deeds. Remember the saying, “What goes around, comes around.”

As a mother to two teenage girls, I know - even our facial and body language would be scrutinised for “signs” of approval or disapproval. A friend had once vouched that her teenage girl (girls are said to be more mentally discerning) even use telepathy to read her mind - so beware of what goes on in our head when in their presence.

Come to think of it, since less people qualify for loans to buy cars now, it may be an opportune time to revert to cycling or better still, walking.

Cycling and walking are certainly more sustainable modes of moving around, more environmentally friendly and healthier options.

When there are less vehicles on the roads and facilities are provided for pedestrians and cyclists, such as covered walkways and bicycle lanes on roads and highways, the walking and cycling vogue is bound to take off.

Less petrol would be consumed and there would be less pollution from vehicular emissions.

As for the property sector, the net income formula and maximum loan-to-value ratio of 70% for a third and subsequent housing loan taken by a borrower would avert unhealthy speculative activities and rein in sharp jump in property prices.

The lower loan quantum would inadvertently increase demand for affordable housing products and developers would have to redesign their products to cater to this market.

The same maxim applies: If the house is still functional, stay put first. Moving into a newer and trendier place, although is a status symbol, incurs cost and may involve higher loan commitment.

Nevertheless, those with the means and surplus cash to spare can opt to invest in multiple properties as they still offer one of the best hedge against inflation.

Deputy news editor Angie Ng says amid the uncertainties eclipsing the world today, major overhauls need to be made to the way people live, and key to this is to be sustainable.

By The Star (by Angie Ng)

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