Slower household debt growth

Credit exposures still manageable with signs of moderation in borrowings

ALTHOUGH the growth of household debt to gross domestic product (GDP) increased last year, the pace was slower with outstanding household debts expanding by 12.5% to 76.6% for the year compared with 2010 when debt grew 13.7% to 75.8%.

Signs of stabilisation in household debts relative to GDP was seen from the second-half of last year after a continued upward quarterly trend observed since 2009 with borrowing continuing to be concentrated in residential properties and motor vehicles, which together account for 64% of total household debt.

“The credit exposures to the household sector continue to be manageable with some emerging signs of moderation in household borrowing, particularly in the second half of 2011,” Bank Negara said, adding that the financial position and debt servicing capacity of households remained sound at the aggregate level, supported by higher income and favourable employment conditions.

But it pointed out that within the household sector, considerably higher levels of leverage with relatively limited buffers against potential income shocks had been observed for borrowers with a monthly income of RM3,000 and below and living in urban centres.

However, it said the risk of a more generalised deterioration in the credit quality of loans in the banking system and broader implications for overall financial stability was assessed to be manageable.

“The concentration of bank exposure to borrowers in this group is relatively low, representing less than 13% of total banking system loans. Based on historical experience on the level of impairment and provisioning, any impairment losses to banks are not likely to exceed Rm2bil or less than 8% of pre-tax profits of commercial and Islamic banks,” it said.

The central bank said bank lending to individuals earning more than RM3,000 per month accounted for about 80% of total loans to households by the banking system while banks had also continued to maintain prudent underwriting standards, resulting in continued improvements in the quality of household loans.

“In the event of a temporary income shock affecting the lower income households, the strong financial position of banks allow for considerable room to facilitate adjustments by the affected borrowers through debt restructuring measures, thus limiting the potential for widespread defaults,” it said.

It said individuals with monthly income of below RM3,000 who resided in major employment centres where the cost of living was significantly higher, spend a larger proportion of their income on basic expenditures such as food, transportation and clothing.

The central bank said this group was more susceptible to income shocks and to some extent, price shocks while outstanding borrowings of individuals in this income group accounted for about 23% of banks’ exposures to households or 12.7% of banking system loans, with the majority of borrowers’ loan facilities concentrated in vehicle and personal financing.

“The leverage positions (derived by dividing average outstanding debt by the median annual income for each income group) of borrowers in this group were 4.4 to 9.6 times of the annual income as compared with 2.3 to 3.3 times for those in the upper-middle and high-income groups,” it said.

With lower savings capacity and higher leverage positions, this particular income group is sensitive to income shocks and interest rate adjustments.