Bank Negara Malaysia’s new guidelines on responsible financing, which was announced on November 18 last year and became effective in January 1, 2012, hasn’t brought about desired results, it would seem.

The Malaysian Automotive Association has reported a 25% drop in new car sales for January 2012, attributing the cause partly to the restrictions on hire purchase brought about by the new guidelines.

Proton Edar Dealers Association Malaysia (PEDA) has issued a press release, in which it said that the BNM guideline is the second policy that has harmed the automotive industry after the amendments to the Hire Purchase Act last year.

It is calling for the guidelines to be reviewed – it said that the guidelines had severely damaged its sales, with only 30% of applications for loan submissions being approved in January. It is reported that the automotive industry is set to meet BNM tomorrow to seek a review of the guidelines.

PEDA added that the BNM guideline will not only curb and halt the automotive industry’s growth, but will affect vendors, distributors, dealers and sales advisors. It added that the income of more than 4,500 sales advisors in its dealer network has suffered as a result of lost commission earnings.

“The guidelines on responsible financing will only give rise to illegal loan sharks and promote (an) unproductive population,” PEDA president Armin Baniaz Pahamin said in the release.

The association said that when banks are more stringent, it provides a better opportunity for loan sharks to grow, adding that the loan shark industry was already at its prime even before the guideline was introduced. It added that the guidelines do not echo the government’s 10th Malaysia Plan and the government’s vision of the automotive industry, which is the most prominent sector after property.

Prior to the implementation of the guidelines, PEDA said that Proton, car manufacturers and assemblers were already having difficulty in attaining a good economies of scale due to the country’s small population. It said that the guidelines will further shrink its potential buyer’s demographic, and with a smaller market, the fate of more than 300,000 employees in direct and indirect employment within the automotive industry and its support sectors will be affected.

The association stated that it feared the repercussions and impact to the industry if the guideline isn’t reviewed. As it is, it said 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, and the least that BNM can do is to encourage healthy competition among bankers to finance buyers and provide a standard procedure of compliance for the public to refer to when buying a car.

Updated footnote: In its release, PEDA explained the procedural requirements and elements needed for a vehicle hire purchase loan application. Initially, I thought it would be rather cumbersome to have placed it into the story, but so as to explain things clearly, I have now included it below, as fully described by PEDA.

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 are not limited to the following:

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 of identity card
vi) Copy of 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 customer’s loan application bearing the credit risk scoring.

With the above requirements, the average duration for approval took a minimum of 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 January 1 2012, all banks interpreted the guidelines differently and practice different measures in approving vehicle loan application but the new Rule of Thumb especially for Proton car buyers includes all the six factors above and the following unwritten-terms:

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

2) or Net income MUST BE RM800 or more. Net income meaning, gross income less EPF and any other loan exposure with banks.

3) Bank statement of at least six months (BNM GL: Para 6.11 and 6.12)

4) No discretionary approval; any applications that does not conform to the requirement are rejected without processing. Since the implementation of the guidelines, banks do not seem to have any flexibility in approving loans.

5) Customer has lost all sovereignty in exercising his/her right to apply for any car loan unless they comply to the Debt Service Ratio (DSR) of the BNM Guidelines. This directly impacts the majority of the national car buyer demographic.

6) A car buyer can only qualify to secure a loan if he/she passes the DSR that totals up all outstanding debts repayment obligations from banks and non-banks (eg cooperatives, building societies, credit companies, and merchants that provide credit sales) against its income after statutory deductions (ie. tax, EPF, SOCSO) (BNM GL Para 6.6)

7) 6 months proof of salary is required for applicants with high ‘variable income.’ Overtime includes overtime, allowances and commission.