Spectre of rising household debt in Malaysia

Spectre of rising household debt in Malaysia

Monday, Jul 22, 2013

Daljit Dhesi

The Star/Asia News Network

PETALING JAYA – Although the latest measures introduced by Bank Negara to rein in household debt would ensure a sound and sustainable household sector, more is needed to prevent debt from reaching alarming levels, said economists.

The household debt in Malaysia, which stands at about 83 per cent of gross domestic product (GDP), is higher than many other countries in the region like the Philippines, Indonesia, Singapore, Hong Kong and Japan. If not prevented, it could put a damper on the country’s 5 per cent-6 per cent projected GDP growth this year.RAM Holdings Bhd group chief economist Dr Yeah Kim Leng said he believes the latest measures, in combination with the earlier ones, would have the cumulative, albeit modest and gradual, effect of crimping household debt.

The latest measures would help to moderate the increase in total household debt, as the earlier responsible lending guidelines introduced last year have only had a marginal impact on slowing down the rise in total household debt to 13.0 per cent in 2012 from 13.4 per cent in 2011.

Certain measures, therefore, have to be in place in combination with the existing ones to ensure the soundness and sustainability of the household sector. “The loan-to-value (LTV), currently at 70 per cent for the third housing loan, and debt-to-income net of all other borrowing measures, could be further tightened. For instance, the 70 per cent LTV could be lowered or applied to the second or first loan, while the debt-to-income could be lowered to 30 per cent instead of 50 per cent of monthly net income,” he told StarBiz.

In addition, he said the net income could be defined more stringently to include other obligations of the borrower. To rein in excessive property price increases that have contributed to rising property loan demand, the real property gains tax (RPGT) could be further raised to curb speculative activities, he added.

Other complementary measures needed include efforts to boost housing supply and containing construction cost increases, he said, adding that more blunt monetary measures such as raising the overnight policy rate or banks’ reserve requirements could be applied if the macro-prudential measures applied thus far prove inadequate to contain household debt build-up.

The latest measures by the central bank to curb household debt include imposing a maximum tenure of 10 years for the repayment of personal loans and a maximum of 35 years for property loans, and prohibiting the offering of pre-approved personal financing products.

Apart from this, key credit providers are required to observe prudent debt service ratios in their credit assessment to ensure households have sufficient buffers to protect them against rising costs and unexpected adverse events. The bank’s new measures also bring some of the lending practices at development financial institutions and non-bank financial institutions (NBFIs) in line with those of conventional banks.

Malaysian Rating Corporation Bhd chief economist Nor Zahidi Alias said more measures were needed to curb speculative activities. “Implementing more measures to curb speculative activities in the property market can be positive. This may include a lower LTV ratio for third property purchases, higher stamp duty for property transactions and higher RPGT. All these would help curb speculative activities,” he noted.

He said the latest measures by the central bank were positive in view of the serious level of household debt in the country. The growth in personal financing has been robust in the past several years, especially among NBFIs, he said, adding that NBFIs had collectively extended 57 per cent of personal financing credit to households in 2012.

Zahidi said no doubt they are secured by automatic salary deductions (for civil servants), but the rapid surge in the amount of personal financing extended to households would pose some sort of risk to the economy through a possible decline in private consumption in the event of a serious downturn.

He foresees the household debt level beginning to stabilise next year should the new measures begin to take effect in controlling the growth in personal financing. He said no doubt there was still a sizeable amount of loans related to mortgages, but at least, they were backed by underlying assets.

In a recent report, Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz noted that housing loans formed the bulk of Malaysia’s household debt at 44.5 per cent, while 16.8 per cent were personal loans.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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