Bank Negara: Banks equipped to handle risks from household debt

KUALA LUMPUR: Credit risk in the banking system is "largely contained" despite the accelerated growth of household debt, said Bank Negara in its latest Financial Stability Review.

Household debt in Malaysia rose 5.3% in the six months to Dec 31, 2019, as compared to 5.1% in the preceding period, mainly owing to loans for the purchase of residential properties, the central bank said in its biannual report.

As at Dec 31, 2019, the overall household debt-to-gross domestic product increased to 82.7% from 82.2% in June 2019 amid slower GDP growth.

However, the ability of borrowers to service their debts was supported by income growth and adequate financial buffers.

"At the aggregate level, both outstanding household financial assets and liquid financial assets remained broadly stable at 2.2 times and 1.4 times of debt, respectively.

"Household financial assets also continued to outpace the growth in debt for the third consecutive year," said Bank Negara.

Meanwhile, the median debt service ratio (DSR) for outstanding and newly-approved loans remained within prudent levels at 37% and 43%.

“As noted in the last Financial Stability Review, some signs of easing in underwriting standards have emerged, as evidenced by the higher share of newly-approved loans to borrowers with DSR exceeding 60% in the past few years.

"Close to two-thirds of these loans were extended to borrowers earning more than RM5,000 per month and about half were credit card and personal financing facilities,” said the central bank.

Nonetheless, the elevated household debt could pose a risk to macroeconomic and financial stability while the Covid-19 pandemic will likely impact the finances of households.

"Going forward, ensuring that further debt accumulation is undertaken prudently, particularly by those in the vulnerable segment, will remain important to secure the financial resilience of households over the longer term.

"Measures introduced by the Government and the Bank in response to the pandemic are expected to support households and provide them with temporary financial relief," said Bank Negara.

Residential property loans were showed to be the leading source of overall household loan impairments in Malaysia, with annual growth of said loans rising to 7% as at end-Dec 2019.

According to Bank Negara, this was owing mainly to borrowers with variable income. However, the central bank said exposure-at-risk associated with these borrowers represented only 2% of total banking system loans.

Borrowings among the vulnerable income group with monthly earnings of less than RM3,000, continued to decline to 17.6% from 18.5% in June 2019. Leverage levels however remained high at about nine times, attributed mainly to borrowings for the purchase of homes.

Aggregate impairment and delinquency ratios also remained low and stable at 1.2% and 1.1% of total outstanding household debt, respectively, it said.

Household asset quality was further supported by the lower average loan-to-value (LTV) ratio of outstanding housing loans from the banking system, which declined to 57% in 2019.

Although higher LTV loans of more than 80% from the banking system increased since 2017 to 32% of total housing loans, the share remains well below the peak levels of earlier periods, when more than half of total housing loans were higher LTVS.

Debt-at-risk from the household sector remained low at about 5.2% of total household debt.

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