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Debt Trap

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“…we have not noticed an alarming trend in terms of the number of people who have sought our assistance…” – Azman Hasim

Azman Hasim, General Manager of Corporate Services at Agensi Kaunseling dan Pengurusan Kredit (AKPK) talks about debt management and the affordability issue. He shares his insights as well as useful tips to help you with your finances.

What is the state of debt in the country and how bad is it really?

Based on our experience at Agensi Kaunseling dan Pengurusan Kredit (AKPK), we have not noticed an alarming trend in terms of the number of people who have sought our assistance in the past month and our statistics show the average number of people who have consulted us has been consistent. A breakdown of customers coming to AKPK for counselling and those who enrolled in our Debt Management Programme (DMP) is listed as below: (updated until 31 July 2013)

What would be the ideal debt-to-income ratio?

As an organisation that disseminates information on financial management education, we recommend a debt-to-income ratio level of 40%. This serves as a benchmark to Malaysians to ensure responsible borrowing.

What are the real/hidden problems behind the cries of the debt issue?

Not all debts give rise to an issue. The main concern is when a debt becomes unmanageable. However, with the measures put in place by Bank Negara Malaysia, household debt levels in Malaysia have not reached an alarming state. Non-performing loans make up less than 2% of total household debt.

What should people be aware of to not fall into the debt trap?

Be aware of all terms and conditions of the loan(s) they are taking on – this includes the fine prints as well. Understand these terms and conditions and if in doubt, seek clarification from the bank before you sign up for a loan. Take note of the repayment structure – due date, amount, and effective interest rate charged. Investment scams. To ascertain ones repayment capability before taking on a loan.

Prominent reasons people go into debt?

According to AKPK’s statistics compiled from our customers, the main reason people face financial issues is because they lack financial education. The breakdown of the reasons for unmanageable debts are as below:


How does one calculate the debt-to-income ratio? 

The debt-to-income ratio indicates a person’s total monthly loan repayments against his gross monthly income. A high ratio indicates that a person may not have sufficient cash for his monthly needs. As a general financial rule, the total monthly repayments on all the loans and credit cards should not exceed 40% of the gross monthly income. Calculation for debt-to-income ratio:

(Monthly loan repayments ÷ Gross monthly income) x 100%

Based on this formula, if the ratio is above 40%, one can opt to increase his income and/or lower his loan commitments to improve his situation.

What should be the steps taken by people and policy makers to ensure national debt does not increase?

Some of the steps that can be taken by individuals to ensure their debts do not get out of hand are:

i)  Make prudent financial management a way of life – this is the first step to ensure one does not take financial assistance above his monthly repayment capability.

ii) Live within your means

iii) Take financial assistance only for productive purposes

iv) Know how to distinguish between needs and wants – this will help you in managing your disposable income better and will hinder you from taking on unnecessary financial commitments.

What has been done to curb debt and what is AKPK’s role in this?

Bank Negara Malaysia has introduced new guidelines with regards to this matter. AKPK, on the other hand, provides an avenue for adult consumers to seek guidance in managing their finances. AKPK plays a two-pronged role in this situation. The first is as the provider of financial education to promote prudent financial managing habits – a measure to avoid over-indebtedness and productive borrowings. The second is providing financial counselling to all Malaysians, and for those who are unable to manage their finances, to restructure their loan repayment structure by way of AKPK’s Debt Management Programme.

In your opinion, what would be a sustainable solution to the affordability and debt issues?

A sustainable solution to the affordability and debt issues would be to continuously educate consumers on the importance of personal financial management. With sound financial management skills, they will be able to budget their income on a monthly basis, save and prepare themselves financially for economic uncertainties. It is important to live within one’s means as the temptation to overspend is ever present. Thus, nurturing self-discipline in terms of spending is important to avoid these temptations. Be aware and cautious of investment scams – If it is too good to be true, it probably is and invest your hard earned money in credible investment opportunities.