Borrowers most affected by decline in total income

  • Economy
  • Thursday, 29 Mar 2018

Financial institutions

PETALING JAYA: Bank Negara, in a series of studies and tests to assess the financial health of borrowers, has outlined three scenarios that would impact a borrower’s debt-repayment capacity.

Calling these “stressed” scenarios that would put “debt at risk”, the central bank said these included a drop in income, rise in the cost of living and borrowing costs.

“The results of the overall stress tests reveal that borrowers are most affected by a decline in total income,” it said.

Borrowers with “negative financial margins” increase the most for those with monthly earnings of RM3,000 to RM5,000. This group, under 40 years of age, has “larger exposure” to motor vehicle loans (22%) and personal financing (30%).

Financial margin refers to the buffer available to a borrower after deducting loan obligations, basic living expenses from the monthly disposable income net of taxes and mandatory contributions.

A 10% decline in income would increase the number of borrowers entering “negative financial” territory by 5.2 percentage points (ppt) from a baseline scenario to 11.7% of total borrowers.

If viewed from the income perspective, borrowers going into “negative” territory will increase to 5.5% of total borrowers from a baseline scenario of 3.1%.

According to the central bank, findings from its Credit Counselling and Debt Management Agency also revealed an increasing trend of borrowers in this 30 to 40 age group defaulting due to “poor financial management and planning.”

Besides “the income shock”, Bank Negara said a higher cost of living also compromises financial buffers of households, but the impact from this would be “lower” comparatively.

“When expenditure rises by 20%, the share of total borrowers with a negative financial margin increases by 3.1 ppt from the baseline.” The report also said this cost of living “shock” largely affects those in urban areas who are subject to higher living expenses. The third factor will be the rise in borrowing cost.

In contrast to the income and rise in the cost of living, borrowers will be “largely unaffected” by a simulated 50-basis-point hike in the lending rate.

The share of borrowers in negative financial territory only increases by 0.7 ppt compared to the baseline scenario.

Significantly, the effect on those earning less than RM3,000 a month would be minimal, as half of their total debt is in the form of fixed-rate financing.

Under the above three “stressed” scenarios, potential losses to the banking system from exposure to borrowers with negative financial margins are estimated to be between RM66bil and RM103.8bil, within banks’ total excess capital buffer of RM124.5bil.

Nonetheless, vigilance with more proactive and concerted efforts are “still needed” to improve household resilience. The central bank said a more sustainable strategy towards housing will be needed, as loans for residential property purchases represent 52% of total household loans.

Other avenues to establish more resilient households include encouraging insurance and takaful coverage as “a safety net”, promoting more responsible lending including among non-bank lenders, and the promotion of financial literacy.


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