Kelvin Goh said the deduction limit, currently set at 60% of a civil servant’s gross salary, should be lowered to around 40%.
Presently, civil servants can authorise deductions from their monthly salaries to repay personal loans taken from authorised banks and agencies, including the Malaysian National Cooperative Movement (Angkasa).
Goh said civil servants should apply the 50-30-20 budgeting rule, which recommends that employees set aside 20% of their salary for savings, 30% for personal needs, and 50% for fixed expenses such as loans, rent and utility bills.
“Civil servants have little left to cover their daily expenses if they commit more than 50% of their salaries solely for loan repayments.
“This creates a domino effect which may require them to rely on additional short-term borrowing, either through credit cards or ‘buy now, pay later’ services, to sustain their lifestyle,” he told FMT.
Goh said banks offer loan programmes with low interest rates but long tenures to civil servants because the group is considered “low risk” and repayments are guaranteed through automatic salary deductions.
This encourages civil servants to borrow beyond their means, ballooning their debt.
“Some civil servants tend to borrow to their limit and use credit cards to cover their daily expenses. When they can no longer even make the minimum payment, they might turn to predatory lenders outside the banking system,” he said.
On Feb 17, insolvency department director-general M Bakri Majid called for the salary deduction limit to be lowered to 55% amid a rise in the number of bankruptcies among civil servants.
As of last year, 14.5% of civil servants were undischarged bankrupts, up from 10.3% in 2021.
Bakri said certain other expenses incurred by civil servants — including contributions towards Amanah Saham Bumiputera and Lembaga Tabung Haji, and repayment of National Higher Education Fund Corporation (PTPTN) loans — are not among the authorised deductions, further reducing their disposable income.
No need for change, says Cuepacs
Cuepacs secretary-general Abdul Rahman Nordin disagreed with Bakri’s proposal.
He attributed the high bankruptcy rate to the accumulation of external debt by civil servants which, he said, was due to their financial illiteracy.
“Sometimes, civil servants will have loans that are not reflected in their payslips. Their net salaries may look ‘pretty’, but they don’t know how to control their external loans,” he said.
Both Goh and Rahman urged Bank Negara Malaysia’s credit counselling and debt management agency (AKPK) to organise financial literacy programmes for civil servants.
Rahman said these programmes must educate workers on the need to avoid making unnecessary purchases and entering into excessive debt.
Goh suggested that Bank Negara Malaysia impose a 20% cap on salary deductions towards repayment of personal loans, since 50% of bankruptcies among civil servants were on account of their failure to pay these debts.
He also said loan agencies like Angkasa should not hand out loans if it would result in a civil servant breaching the 20% cap, adding that banks were in a better position to assess a borrower’s repayment ability before approving a loan.