Easy credit gets easier, but veritable pitfall looms for vulnerable

 

Getting loans or spending money that is not yours has become easier with a host of innovative financing schemes. (Reuters pic)

PETALING JAYA: It is great that getting hold of some extra cash is a lot easier nowadays, especially during dry months when ends just do not meet. However, what about when it comes to paying it back? Are we able to repay the loans with interest?

Getting loans or spending money that is not yours is becoming easier with a host of innovative financing schemes. But market observers are warning that this could result in unrestrained spending and indebtedness that can lead to financial distress and even bankruptcies for individuals and households.

Innovative financing schemes that have sprung up in recent times include GOpinjam that offers personal loans from as low as RM100 to a maximum of RM10,000 with an interest rate of 8%-36%.

There are also buy now pay later (BNPL) schemes such as Atome, Grab Pay Later, Fave Pay Later and Shopee where customers make multiple payments in instalments rather than in a single lump sum.

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Apart from that, the use of credit card loans and equity crowdfunding is rising as well. The government has lifted the current fundraising limit for crowdfunding from RM10 million to RM20 million. These are offered by platforms like pitchIN, MyStatr, Ethis Malaysia and AirFunding.

Sunway University’s Yeah Kim Leng explained that easy financing came about to entice consumers to spend more or provide access to easy loan financing without the need to prove repayment capabilities or provide collateral.

However, he warned that it could lead to an increase in individual and household debt levels, particularly if the schemes are able to reach underserved and unserved segments of the population as well as expand credit to already leveraged households.

“While innovative financing schemes are welcome to increase financial access and inclusion, there is a corresponding need for greater financial awareness and education of the public to inculcate prudent spending and savings behaviour,” he told FMT Business.

He said such schemes are viewed positively if they reduce transaction costs and provide greater flexibility and convenience to users.

“Given that the country’s household debt level is among the highest in the region, a further rise will increase the vulnerability of the households to financial and economic shocks,” Yeah said.

Malaysian households have nearly RM1.38 trillion worth of debt, exceeding what the federal government owes to its creditors.

“Indicators on the banking system’s non-performing loans and individual bankruptcies do not flag a systemic problem in the near term,” he said.

“However, the newer forms of credit expansion, while they could be small currently, merit closer scrutiny so that the households’ actual leverage and exposure are not underestimated.”

Head of research at the Malaysian Institute of Economic Research Shankaran Nambiar said more consumers will turn to BNPL schemes as a result of reduced effective income brought on by inflationary pressures.

“This could elevate the risk of default,” he told FMT Business. “Two things need to be done – people should be counselled on managing their finances, and there should be mechanisms that clamp down on excessive use of credit facilities.”

He suggested that these devices could perform quick credit checks and send warnings if borrowers are taking on debt that is above their means to comfortably repay. - FMT