Rising concerns over household debt and bankruptcies among young M'sians

Monday October 25, 2010

By YAP LENG KUEN

Household debt to GDP rose to 76% last year from 64% in 2008
PETALING JAYA: Rising concerns over household debt and bankruptcies among the young have prompted several suggestions on how to tackle the problem at source.
Apart from the expected curbs on property loans and possible limits on credit card usage, other steps include the creation of a personal credit scoring system, enhanced education and awareness among consumers as well as the financiers themselves.
RAM Ratings head of financial institution ratings Promod Dass said: “Based on the latest available Bank Negara statistics, household debt to gross domestic product (GDP) has marched upward from about 64% in 2008 to around 76% last year.
(Last year, this amounted to about RM389 bil).
There is rising concern over household debt and bankruptcies among the young in Malaysia
“This level is similar to that in Singapore and far lower than in Japan, the United States and Britain which are well above the 100% threshold.
“It is likely that household debt to GDP would keep escalating beyond a manageable level, if measures are not put in place, given that interest rates are still relatively low in Malaysia and credit for qualified borrowers is easily obtained,’’ said Promod.
According to CIMB Investment Bank Bhd chief economist Lee Heng Guie, property loans make up about 50% of household loans, auto (27%), personal uses (8.9%) and credit cards (6.3%).
The financial assets cover - comprising savings, investments and insurance - remain strong at 2.3 times; nevertheless, rising household debt may constrain consumption especially with any rise in interest rates and debt service costs.
“There should be more awareness on educating households on how to manage their debt,’’ said Lee.
“While authorities and the financial sector could educate potential borrowers through detailed booklets or information on websites, a more effective approach would be to require borrowers to have credit scores before they obtain loans as in some developed markets.
“In this way, borrowers will be aware about changes in their credit profile as they gear up and the impact it will likely have on their borrowing rates,” said Promod.
The Credit Counselling and Debt Management Agency (AKPK) has pointed out that during the past year, almost 50% of the 3,000 individuals who approached the agency for credit counselling each month were aged between 30-40 years.
Another 15% were in their 20s.
According to the agency, problems over car loans and credit card advances were the top two reasons young Malaysians sought credit counselling.
To Malaysian Rating Corp Bhd (MARC) vice-president and head of financial institution ratings Anandakumar Jegarasasingam, the rising level of household sector loans is “a definite concern.’’
“In fact, the household sector is the single largest sector exposure for Malaysian banks, accounting for 55% of banking sector loans at end-2009 – a very significant increase from the low 16% of banking-sector loans at end-1998,’’ he said.
Anandakumar believes that the repayment ability of the household sector is overestimated for the following reasons:

  • Considering that the bulk of household sector borrowings is for mortgages and auto financing, the distribution of household sector debt is likely to be more even among the population than the distribution of financial assets.

  • The vulnerability of the household sector’s financial asset holdings to adverse wealth and income shocks as a result of the increased proportion of market price-dependent financial assets.

  • Anecdotal evidence suggests that bankers are focusing more on the underlying collateral, especially for mortgages and auto loans. During a system-wide crisis, when defaults escalate and asset prices are depressed, the recoverable value of such collateral can diminish rather rapidly.
    According to Anandakumar, the proposed reduction of the loan-tovalue (LTV) ratio for the purchase of the third property may not be sufficient to control the level of household sector debt.
    Possible policy measures to curb the rising household sector debt include the imposition of more stringent LTV ratios for multiple home purchases within a particular time band and for properties of certain value; fixing a higher minimum income requirement to be eligible to apply for credit cards and personal loans; limiting the maximum credit limit on credit cards to the equivalent of two months’ salary as well as the number of credit cards that an individual can hold to two or three cards

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