Malaysia's household debt on the rise

By TEE LIN SAY linsay@thestar.com.my

But mortgage NPLs at an all-time low

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PETALING JAYA: Malaysia's household debt rose at a rapid rate of 11.1% per annum from 2004 to 2009, and from RM516.6bil at end-2009, it climbed by 8.4% to RM560.1bil as at end-August 2010, said CIMB Research.

The household debt to gross domestic product (GDP) ratio increased from 66.7% in 2004 to 76% in 2009 but is estimated to ease to 74.6% at end-2010.

The rapid growth of household borrowings is causing some worries that the excessive leveraging by households may make the economy and financial sector more vulnerable to instability and crisis.

HwangDBS Vickers banking analyst Lim Sue Lin said that the increase in household debt was also due to the cheap housing loans in the market over the last one to two years.

“What's heartening is that the balance sheets of our local banks are strong enough, and the default rates are low. In fact, mortgage non-performing loans (NPLs) are at an all-time low,” she said.

As at December 2010, mortgage NPLs stood at 3.3%. Its highest level was at 8.6% or about RM14bil in 2006. Since March 2007, this figure has been trending down.

Last year, in a bid to control appreciating property prices, the central bank increased the loan to value cap ratio to 70% for the third and subsequent mortgage loans. This move was applauded by economists and analysts as it was basically the central bank's way of curbing speculation.

“With banks requiring to set aside higher risk weights of 100% (from 75%) for mortgages with loan-to-value above 90%, this implies that banks would need to be more vigilant in utilising their capital. However, we think that if banks are still able to secure good quality mortgage loans with minimal credit cost issues, they may continue to give out mortgages at 90% loan to value,” added Lim.

Certainly, rising property prices have fanned an increase in borrowings. The share of household loans to total bank loans rose from 35.2% in 2000 to 55.5% as at end-August 2010. Mortgage debt accounts for 48.5% of total household loans currently.

Another banking analyst said that while the household debt level was high, Malaysians also had a very high savings rate, at about 35% of GDP.

“Bank Negara's control of the mortgage market is its way of controlling household debt. Thus, this should not dampen the sentiment of the market as the authorities are mindful and pre-emptive of this situation,” said this banking analyst.

CIMB head of economics Lee Heng Guie said the various financial indicators indicated that Malaysia's household balance sheet remained healthy with financial assets' coverage of total debt at 2.5 times, the liquid financial assets to debt ratio remained strong at 148.6%, and the non-performing loans ratio was low at 3.1% vs 8.5% in 2004.

“The strong balance sheet enabled the household sector to continue servicing its debt despite the rise of the debt service ratio to 49.2% in 2009 (38.4% in 2004),” said Lee.

As at end-August 2010, mortgage loans accounted for 48.5% of total household loans and 26.9% of total bank loans, followed by motor vehicle financing (25.9% of total household loans).

Credit card lending accelerated 16.4% per annum in 2000 to August 2010, pushing its share of total household loans from 5% in 2000 to 6.1% currently.

“Credit card lending now totals RM28.6bil or 3.4% of total bank loans. This means that higher interest rates would cause real hardship for those with large mortgages,” said Lee.

He added that on the demand side, the rapid build-up of household debt stemmed from changing demographics, strong economic growth, a steady rise in incomes and low interest rates.

On a cautionary note, Lee said that excessive household indebtedness not only raised concerns over its sustainability but also posed a risk to the financial system.

“High levels of household debt may also constrain the effectiveness of monetary policy as it heightens the sensitivity of households' behaviour to changes in interest rates,” he added.