ROOT SOURCE STILL CORRUPTION: Our spiralling debt may be due to rising cost of living?

RECENTLY, the government announced strong measures to check the increasingly worrying trend of Malaysians falling into   debt.

The measures are well and good. Banks must now shorten the duration of mortgages and offer credit cards only to those who meet the minimum creditworthiness.

But the authorities could have gone one step ahead, by studying why more and more Malay-sians are mired in debt.

Just concluding that more Malaysians, especially the younger generation, have the knack for living beyond their means seems too simplistic and too general. Just what constitutes living within one's means in Malaysia?

Malaysians are exposed to credit early in their lives and one of their first debts is incurred for buying cars.

It is hardly surprising, therefore, that studies conducted on personal debt in Malaysia have pointed to defaults in repayments of hire-purchase loans as one of the major contributors to the higher number of young bankrupts in the nation.

Buying a car cannot be construed as indulging in things beyond one's means in Malaysia. A car is a necessity, no thanks to the poor public transport system.

For many, buying a car itself is a challenge but made possible and attractive by the generous banking rules regarding hire-purchase.

In Malaysia, the duration of a hire-purchase loan can be extended to nine years.

This consequently means hire-purchasers have the flexibility of making relatively small amounts of repayments.

But the small amounts of repayments also mean the hirers will have to pay for a much longer period and will have to service more interest on the loans.

Banks like this because more can now borrow and the loan can be spread wider for more interest income.

Car companies cherish it, too, because more can now buy cars. For the buyer, however, his debt obligation on the hire-purchase of a car is one of the credits he is exposed to.

If the buyer is young, and had just joined the working class, he is most likely to hold at least one credit card.

The time will soon come for him to be married, buy a house and raise a family.

While these commitments are nothing out of the ordinary, it seems they are principal causes why more young Malaysians are mired in debt.

Hence, while we seek to instil stronger financial discipline in Malaysians, we must also look at price, the minimum cost of living, especially in cities, and, most importantly, whether our wages correspond to price movements and trend.

A car, for example, while not necessarily expensive in Malaysia, remains sold at prices way above their suggested manufacturing price, after applying duties, taxes and insurance.

The customer then applies for a hire-purchase loan based on the on-the-road price and after deducting whatever deposit he has put up first. He will have to bear interest costs on the loan.

In fact, after the maximum period of nine years, quite a sizeable portion of the hire-purchase loan is to pay for taxes and interest.

The young Malaysian then has to service, presumably, his other loans, including mortgage on his house and, almost always, his credit card bills.

The amount can be staggering for someone who probably just entered the job market and we have yet to take into account his living expenses, which is another challenge in itself, given the escalating prices of even necessities these days.

We may have been too quick in saying that younger Malaysians tend to splurge without any study being conducted on what it is that they spend on.

Perhaps the problem requires more than just the tightening of credit.

Perhaps it requires a wider solution, such as also controlling the general cost of living.

Some purchases, like buying a car, are a necessity when there are problems with the public transport system.

NST