Lenders told to help low, middle-income households as inflation bites

K. Kabilan

Malaysians from the low- and middle-income households are hard-hit with the rising cost of living and the tough economic situation. – The Malaysian Insight pic, May 6, 2024.

MALAYSIANS from the low- and middle-income households are hard-hit with the rising cost of living and the tough economic situation.

With Malaysia’s inflation rate standing at 1.8%, day-to-day survival for these groups becomes increasingly challenging. For context, the inflation rate was at 1.5% last November.

This situation will affect borrowing behaviour as individuals and businesses may seek more short-term credit to manage escalating costs and cope with unexpected emergency expenses, said Hui Yik Seong, a former director at Barclays Investment Bank.

He called for lending institutions to adopt strategies to assist those in the low- and middle-income groups, as well as small and medium enterprises (SMEs).

“Some individuals and businesses might experience a decrease in real income due to the inflationary impact on the costs of goods and services essential to their operations.  

“This can, however, lead to decreased creditworthiness as higher living and operational costs may result in lower net disposable income, making it more challenging to meet financial commitments, thereby increasing credit risk,” he told The Malaysian Insight. 

He further noted that as inflation rises, central banks often respond by increasing interest rates to control economic overheating. 

“This adjustment can lead to higher monthly repayments for loans tied to variable interest rates, further straining borrowers’ financial capacity,” said Hui, who has 15 years of capital market, finance and accounting experience.

He said some individuals and SMEs may also see a decreased creditworthiness as higher living and operational costs will result in lower net disposable income.

Hui said that to assist such needy individuals and businesses, lending institutions can revise their credit evaluation frameworks to account for the economic impact of inflation on an applicant’s financial stability. 

“Lenders can also develop products that reflect the current economic reality,” said Hui, who is also the founder of Direct Lending, an online personal loan platform.

He gave an example of his agency, which offers auto service financing, which allows car owners to manage the costs of necessary vehicle repairs and maintenance through affordable monthly installments spread over up to 12 months. 

“This type of product is particularly helpful in times of inflation, as it provides a manageable financial solution without the need for large, immediate outlays of cash,” he said.

He also said that lending institutions must provide options for loan deferment, interest-only payments for a period or restructuring loans to help borrowers.

“Lending institutions can play a role in providing financial assistance during times of economic uncertainty. 

“We must also increase our efforts in financial education and responsible lending practices to ensure that borrowers understand their commitments and are less likely to overextend financially,” he added.

Focus on budgeting

Hui also said that the current economic condition was also seeing individuals and families tightening their budgets by prioritising essential over non-essential expenditures. 

He said they were switching to cheaper alternatives, delaying major purchases or cutting down on luxuries. 

“There’s also an increased focus on budgeting tools and financial planning to better manage limited resources.

“These families often have less financial cushioning and limited access to credit, making it difficult to absorb the increased cost of living. 

“Rising prices mean that their already stretched incomes have to cover more, often forcing them to make tough choices between basic necessities,” he said.

He said lending institutions can play a role in providing financial assistance during times of economic uncertainty. 

“By offering quick, accessible loans with transparent terms, we can help individuals and businesses manage cash flow challenges,” he further said. 

He added that by implementing the right strategies, lending institutions can support their clients through challenging economic times.

“We can help them in maintaining financial stability and fostering long-term customer loyalty.”

Tightening the belt

For 62-year-old M Jagan, income from driving Grab is becoming insufficient to manage his household expenses.

“Weekly marketing is now a major pain as I seem to be spending more every time I go. We have to compromise with these weekly trips, just as we are also reducing the monthly grocery shopping.

“And when we buy, we tend to buy lesser things, or cheaper products,” said the father of five children.

Fortunately for him, his children are all independent and he only has to provide for his wife, who is a homemaker.

“My biggest issue is repair costs for my car. Almost monthly, I have some expenses coming to keep the car roadworthy.

“And then, there is this talk about fuel subsidies being removed. I just hope whatever plan the government has to help the poor, I will be part of it,” he said.

He added that many of his fellow drivers are in the same boat, all struggling to put food on the table for their families.

Some, he said, were also finding it extremely difficult to repay their monthly loans to lending institutions. – May 6, 2024.

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