Personal loans' long tenure will keep M'sian indebtedness high

Kuala Lumpur

RISKS emanating from Malaysia's high household indebtedness continue to moderate but the level of indebtedness is not likely to dip in the coming years because of the long average tenure remaining on the loans. A borrower could previously take a 45-year home loan, for instance.

On Wednesday, the central bank revealed Malaysia's household debt had inched up to 87.9 per cent of GDP from 86.7 per cent in 2013, marking the second consecutive year of moderation.

Its growth of 9.9 per cent was the slowest pace since 2010, observed Bank Negara Malaysia (BNM) governor Zeti Akhtar Aziz, when presenting the bank's 2014 annual report.

The moderation notwithstanding, the central bank observed the long average remaining maturity of loans taken in previous years means the high level of household indebtedness is likely to remain elevated for a number of years, AllianceDBS Research said in a report on Thursday.

Following a period of very easy credit in 2008 to boost domestic demand - the household debt-to-GDP ratio then stood at 60.4 per cent - micro-prudential measures were introduced in 2010 and gradually stepped up to prevent overheating in the economy especially on the housing front.

Stricter lending rules have resulted in one in two borrowers being turned away, car dealers and property agents claim. Some say the rejection is as high as 70 per cent for first- home buyers.

Prior to the tightening in mid-2013, homebuyers could take a 45-year loan but this is now limited to 35 years. The personal loan repayment period was also reduced to 10 years from 25. Even now, car loans can be extended for up to nine years.

Ms Zeti said lending guidelines would not be loosened as interest rates remain accommodative at 3.25 per cent (OPR, or overnight policy rate), and financing is readily available to borrowers able to meet credit requirements.

On the bright side, BNM said micro-prudential measures have resulted in the continued deceleration in personal loans, with growth slowing to 5 per cent against 25 per cent in 2013. The central bank welcomed the development given the lack of collateral on such loans.

Banks are also registering a higher quality of new borrowings amid more robust assessments of affordability.

In addition, BNM noted a lower share of debt attributable to more vulnerable households - those least able to afford a rate hike.

Alarmingly, a survey by Khazanah Nasional revealed the debt-service ratio of households in 2013 stood at nearly 44 per cent (the more prudential level is about 30 per cent) and that many resort to buying electrical items on credit.

The debt-service ratio for the 1.5 million-strong civil service was even more worrying at 60 per cent.

A large chunk of personal loans is offered by non-bank financial institutions, which do not come under BNM's purview.

Even so, the central bank has extensive powers to introduce measures if it sees risks emanating from their activities. Going by the latest improvements, Bank Negara does not believe vulnerabilities in the household sector are likely to have a material impact on the financial stability of the banking sector.