Bank Negara: Use DSR, financial margin to measure household debt

PETALING JAYA: The debt service ratio (DSR) and financial margin should be used to measure household debt, according to Bank Negara’s 2016 annual report.

The central bank said although the ratio of household debt to gross domestic product was a common measure of household indebtedness, it provided little insight on the quality of debt due to several key information gaps.

“One cannot directly infer the debt repayment capacity of households from the ratio, as it does not take into account the available savings and wealth of the borrowers.

“Neither does the ratio provide any information on the distribution of debt or pockets of weaknesses across borrowers with different income levels,” Bank Negara noted.

Therefore, the central bank said the ratio was insufficient for policy analysis and design.

Analysis also showed it could lead to wrong and erroneous conclusions. The DSR and financial margin could provide more granular assessments of potential household vulnerabilities and the implications for financial stability.

For several years now, Bank Negara has published more detailed analyses in the Financial Stability and Payment Systems Report on the distribution of household debt and repayment capacity. This article extends these assessments, using the indicators of DSR and financial margin derived based on data from the recently established Integrated Income Indebtedness Database (IIID) by the central bank to match borrowings of individuals captured in the Central Credit Reference Information System (CCRIS) with their income information reported to the Inland Revenue Board of Malaysia.