Bank Negara Malaysia Annual Report 2013 Household debt continues to rise

by **Cals** Thu 20 Mar 2014, 18:56

Bank Negara Malaysia Annual Report 2013 Household debt continues to rise

Business & Markets 2014

Written by Yen Ne Foo of theedgemalaysia.com

Thursday, 20 March 2014 10:35

KUALA LUMPUR: Despite slower growth in household borrowings, the level of household debt in the country increased to 86.8% of gross domestic product (GDP) in 2013 from 81.1% in 2012.

However, Bank Negara Malaysia (BNM) believes this will not pose risks to domestic financial stability, due to strong fundamentals of the household and financial sectors.

“Risks to domestic financial stability, however, remained well-contained given the strong fundamentals of the household and financial sectors, and pre-emptive measures in place to restrain excessive behaviours.

“The steady economic growth and favourable employment conditions further reinforce these fundamentals,” the central bank said in its Financial Stability and Payment Systems Report (FSPSR) 2013.

It said aggregate household borrowings grew at the slowest pace of 11.7% in 2013 to RM854.3 billion following the introduction of a series of measures in 2010 to rein in excessive accumulation of debt by households.

This was driven by the substantially slower pace of expansion in lending by non-bank financial institutions (NBFIs) in the second half of last year.

“The aggregate balance sheet of households remained healthy, with stable employment and income conditions throughout the year, lending continued support to the financial strength and debt servicing capacity of households at large.

“Household financial assets expanded at a closer rate to the pace of growth in household debts, compared with previous years,” BNM said, adding that aggregate household borrowings had risen 13.5% in 2012 and 2011, and 15.1% in 2010.

BNM said banks remained the main credit provider to households, accounting for 80.9% of household debt. Close to 60% of lending to households was for the purchase of properties and investment in equities and unit trust funds.

“The combined effects of incremental measures introduced since 2010 to curb excessive indebtedness continued to be observed, particularly in reducing the vulnerability of lower-income households and preventing households in general from becoming over-leveraged.”

The central bank said the proportion of households with monthly earnings of up to RM3,000 accounted for a significantly lower share of total household borrowings at 27% (2012: 33%) or RM230.7 billion.

“Although aggregate leverage for households earning up to RM3,000 a month was stable at about seven times (measured as the ratio of outstanding borrowings to annual income), the level remains high.

“It would be prudent to reduce the level of leverage for this group of borrowers to increase their buffers against income or expense shocks,” it added.

As part of the move to reduce the households’ leverage, the central bank instituted several measures in July and November last year. These included limiting the repayment period for the purchase of properties to 35 years from 45 years, and personal financing by NBFIs to 10 years from 25 years.

The offering of pre-approved personal financing facilities without an application from the borrower was also prohibited. Apart from financial institutions regulated by BNM, these measures were extended to all credit co-operatives and two large retail credit providers — Malaysia Building Society Bhd (MBSB) and AEON Credit Service (M) Bhd.

In addition, financial institutions were prohibited from financing the development and purchase of properties with elements of interest capitalisation schemes, including developer interest bearing schemes.

BNM said following the implementation of these measures, the annual growth in outstanding NBFI lending to the household sector more than halved for 2013, dropping from 22.1% in 2012 to 9.6%. There was also a marked slowdown in the annual growth of personal financing to 13.9%, compared with 25% in the first half of the year.

BNM said the high level of indebtedness of households is expected to persist over the next few years but will moderate when BNM and governmental measures become more entrenched.