Tuesday, 21 February 2012

BANK NEGARA GUIDELINES ON RESPONSIBLE FINANCE- THE IMPACT

On 18 November 2011, Bank Negara Malaysia issued a guideline (BNM/RH/GL 000-5 Guidelines on Responsible Finance) to financial institutions aimed at promoting prudent, responsible and transparent retail financing practices. The guideline that  took effect on 1 January 2012 are applicable and was issued pursuant to six (6) Statutory Acts  namely, Section 126 of the Banking and Financial Institutions Act (BAFIA) 1989; Section 53A of the Islamic Banking Act 1983, Section 201 of the Insurance Act 1996, Section 69 of the Takaful Act 1984, Section 126 of the Development Financial Institutions Act 2002; and Section 70 of the Payment Systems Act 2003.

1. The guidelines that covers all form of financing from car loan to overdraft and even credit cards will give rise to loan shark and create unproductive population. When the Banks are more stringent, it provides a better opportunity for loan shark to grow. The Guidelines provide them with a bigger population and opportunity. The loan shark industry was already at its prime even before the guideline was introduced.

2. The demographic for PROTON car buyer represents the majority of Malaysia populations with low salary but earns from multiple source of income. The commitment to pay the monthly fix housing mortgage and vehicle loan repayment is in itself a drive for many to work harder to secure their employment and be promoted which in turn enhances overall productivity.

3. The income of more than 4,500 sales advisors employed by PROTON Dealers network were badly injured when the Sales Advisors were not able to earn commission from sales when their customer’s loan application were either rejected or refused for loan processing in compliance to the BNM guidelines.

4.  The guideline had severely damaged our sales with only 30% application for loan submission in January were approved. Although Malaysia Automotive Association reported a 25% drop in sales for January 2012, PEDA believe the actual drop was more as many from January sales were the spill-over from December when customer waited for the new year to register their cars and when customer had already obtained their loan financing was before the Guideline took effect in January 2012.

5. Bank Negara Malaysia Guidelines too does not echo the government’s 10th Malaysia Plan and the Government’s vision that placed automotive industry as one of the most prominent sector after property. The automotive industry is already facing difficulty to attain its production economics of scale because 90% of Malaysia automotive productions are for domestic sales and if domestically, our cars are not sellable due to adverse Guideline, then we mind as well re-write the whole automotive future direction. Prior to the implementation of the guidelines, PROTON, car manufacturers and assemblers are already having difficulty with attaining a good economics of scale due to our small population. The Guideline will further shrink our potential buyer’s demographic. With a smaller market, the fate of more than 300,000 employees in direct and indirect employment within the automotive and its support sector will be affected. The guideline is expected to affect PROTON and PERODUA market the most.

6. The guideline that now acts as a minimum standard of compliance had badly injured the automotive industry with only 30% loan approval rate in January 2011 for new PROTON car sales. If this measure is not reviewed, our automotive industry that supported the economic growth will slowly collapse, as the average Malaysian population will not be able to meet the guideline to buy a car.

7. PEDA fear the repercussion and impact to the eco system if the Guideline is not being reviewed.  Curbing the loan financing for car buyers is akin of introducing a policy to halt the automotive industry. The lackadaisical support extended to the automotive industry was already felt with the amendments of the Hire Purchase Act last year that had created a lot of red tapes in our daily operation. 

8. There is no driver or custodian to automotive industry but there are a lot of road bumps that will not only hinder the growth of the sector but will stop the industry from moving forward. The automotive industry is at the mercy of various adverse governmental policies and there are no agencies that act as an authorized body to protect the industry eco-system and to secure a long-term growth.  The automotive industry is fragile without a custodian or guardian especially when the automotive industry contributes significantly to our economy. The BNM Guideline is the second policy that had harmed the automotive industry after the amendments to the Hire Purchase Act last year.

9. The least that BNM can do is to encourage healthy competition among Bankers to finance our buyers and provide a standard procedure of compliance for the public to refer to when buying a car. 

10. Although Malaysia Motor Association reported a 25% drop in sales for January 2012, PEDA believe the actual drop was more as many from January sales were the spill-over from December when customer waited for the new year to register their cars and when financing was less stringent.


11. Paragraph 4 of the Guideline specifically mentioned Vehicle Financing Products alongside home financing, personal financing (including Overdraft facilities), credit and charge card products and financing products for the purchase of securities except share margin that is governed by Bursa Malaysia rules.

PRACTICES BEFORE BNM GUIDELINES

Prior to the guideline, the industry was already affected with strict procedures for vehicle loan application. Application for Vehicle Hire Purchase Loan financing approval was previously based on:

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

2) Individual Banks Credit Risk Scoring which include but not limited to the followings:

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 Identity Card
vi) Copy 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 customers loan application bearing the credit risk scoring.

With the above requirements, the average duration for approval took a minimum 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 1 January 2012, all Banks interpreted the guidelines differently and practices different measures in approving vehicle loan submission but the new Rule of Thumb especially for PROTON CAR BUYER includes all of the above and the following unwritten-terms before Banks can accept the loan application for processing. The unwritten terms for car loan applications are as follows:

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

b) or Net income MUST BE RM800 or more. Net income meaning, Gross Income less EPF and any other loan exposure with Banks. 

c) Bank statement of at least 6 months.

d) No discretionary approval, any applications that does not conform to the requirement were rejected without processing. Since the implementation of the guidelines, Banks does not seemed to have any flexibility in approving loans. 

e) Customer's lost all sovereignty in exercising its right to apply for any car loan unless they comply to the Debt Service Ratio (DSR) of the BNM Guidelines. This directly impacted the majority of national car buyers demographic.

 For full details of the BNM Guideline click HERE.

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