Bank Negara Malaysia issued today guidelines to financial institutions aimed at promoting prudent, responsible and transparent retail financing practices. The guidelines which will take effect from 1 January 2012 complement other measures that promote better protection for financial consumers and a sustainable credit market that contributes towards preserving financial and macro-economic stability.

The guidelines require financial institutions to make assessments of a borrower's ability to afford financing facilities based on a prudent debt service ratio as inputs to their credit decisions. Financial institutions must make appropriate enquiries into a prospective borrower's income after statutory deductions for tax and EPF, and consider all debt obligations, in assessing affordability. While this is consistent with the current practice of most financial institutions, the guidelines will facilitate a sharper focus and more consistent approaches across the industry to assessments of individual affordability. This guideline will thus ensure that the increasingly competitive conditions will not lead financial institutions to compromise prudent and responsible financing practices.The Guidelines also stipulate that the maximum tenure for vehicle financing applications that are received from 18 November 2011 should not exceed nine years.

The guidelines additionally aim to encourage sound borrowing decisions by consumers through better engagements with financial institutions that will help consumers carefully consider their ability to service all their debt obligations without recourse to further debt or substantial hardship. Clear expectations are also placed on financial institutions to ensure that consumers are treated fairly in the sales, marketing and administration of financing facilities. Financial institutions are also required to provide consumers with specific information on the total repayment amount and total interest cost as well as the impact of an increase in the financing rate to ensure that consumers understand the full implications of a borrowing decision. Bank Negara Malaysia will continue its surveillance and supervisory activities to ensure that the requirements are properly implemented.

Apart from the financial institutions under Bank Negara Malaysia's purview, the Cooperatives Commission will also be imposing requirements on responsible financing practices on credit cooperatives. This will ensure that key providers of financing to the household sector will observe similar responsible financing practices.