High levels of household debt remains risk to country’s financial stability

PETALING JAYA: The elevated level of household indebtedness remains as a source of potential risk to macroeconomic and subsequently, financial stability, according to Bank Negara Malaysia’s (BNM) Financial Stability Review.

“The income and balance sheets of households are also likely to be affected by the Covid-19 pandemic,” it said.

Measures provided by the government and the central bank are expected to support households and provide them with temporary financial relief, however, BNM noted that ensuring that further debt accumualation is undertaken prudently will remain importatnt to secure the financial resilience of households over the longer term.

In the second half of 2019, household debt expanded at a faster rate, primarily driven by loans for the purchase of residential properties - bolstered by the Home Ownership Campaign. Personal financing and credit card loans also recorded higher growth, largely attributed to lending by development financial institutions to civil servants.

The ratio of overall household debt-to GDP correspondingly edged higher to 82.7% as at end-2019 amid slower GDP growth, and remained elevated relative to regional peers.

Overall, household impairments continued to be driven by residential property loans.

Risks to financial stability however, remain contained as exposures-at-risk associated with these borrowers account for only 2% of total banking system loans.

Aggregate impairment and delinquency ratios also remained low and stable at 1.2% and 1.1% of total outstanding household debt respectively.

With at least two-thirds of household financial assets and liquid financial assets held by individuals earning more than RM5,000 a month, concerns remain that lower-income households may face difficulty servicing their loans.

However, debt-at-risk for the household sector remained low at about 5.2% of total household debt.

“Based on a sensitvity analysis that simulates the impact of severe stress scenarios on borrowers’ debt repayment capacity, potential losses to the banking system are estimated to be between 42.6% to 67.5% of banks’ excess capital buffers,” the report stated.

source https://www.thesundaily.my/business/high-levels-of-household-debt-remains-risk-to-country-s-financial-stability-LD2207409