PART 2 – QUALITY OF BORROWERS

Another factor that we need to understand is that Banks give loan to a diverse group of people in terms of their “financial strength”, “credit worthiness” or simply the ability to service the loan. Of course Banks are always prudent in giving out loans and screening their borrowers but in some cases, “borderline” and “a bit above borderline” borrowers do exist where loans are given with the assumption that their economic well being might improve over the years with yearly increment of their salary. Factors like recession cycles and global financial instability are not really taken into greater context as the economy is always expected to “grow” indefinitely with inflation being the unavoidable side effect. On the other hand, you may also get loan based on the “know who”  technology inside the Bank even though your credit standing is not so good. The “bigger” the person in the hierarchy that you know, the “bigger” and the higher risk loan and lower interest rate you may get and this sometimes happens in the banking circles.

Therefore, in “normal” circumstances where everybody is “chasing” money to pay for their loans, there are bound to be people who will fall on the wayside and normally most of them are the “borderline” cases while there may also be those from the “prime” category due to business failure or some other factors.

Things will go haywire when there is an economic crisis like what happened during the Asian Financial Crisis due to currency manipulation in 1997 where "good" and "consistent" paymasters suddenly become "bad" borrowers. This situation may happen again with a greater impact given the current state of the global economy and the potential of a global scale war breaking out The after effects of the financial crisis of 2008 is still upon us where we were exposed to major frauds in the financial sectors particularly in the US and Europe. It is said that the US Dollar has lost 98% of its value and even if that is a correct estimate (probably it is a negative figure already), will only be worth RM0.06 sen and this is the value where oil is sold and this is the RESERVE currency of the majority of countries in the world. Now that is really living on the edge! "Owing" money created out of nothing and paying interest on it and having reserves which is basically worthless! Whatever the case may be, default will always occur due to the added value of interest or USURY and much more so in the current state of the economy where inflation has reared its ugly head and more and more people are finding hard to make ends meet and some are plunging deeper into debt just to survive and end up paying more interest in the form of  late charges for missing their scheduled payments. If we are to take the above RM755,000,000,000 figure, a default ratio (now with a more subtle name of “impaired” loan) of even 5% will give a figure of about RM38 billion. Ok, maybe some people will say that is too “high” so we will take the “accepted” industry standard of 2% as being “normal” and the figure should be around RM15,000,000,000 (billion)  which is also a lot of “money” (mostly in computers) and that is not including normal and compounded interest and late charges (also in the computer, not "released" yet)

END OF PART 2

NEXT: PART 3 - TYPE OF LOANS IN THE HOUSEHOLD DEBT PORTFOLIO