Measures provide temporary relief, but elevated debt still a risk

Measures introduced by the government and Bank Negara in response to the Covid-19 pandemic is expected to support households and provide them with temporary financial relief.

However, the elevated level of household indebtedness still remains a source of the potential risk to macroeconomic and subsequently financial stability, the central bank said in its Financial Stability Review (Second Half 2019) report.

Going forward, ensuring that further debt accumulation is undertaken prudently will remain important to secure the financial resilience of households over the longer term.

This is particularly by those in the vulnerable segment, said the central bank.

Bank Negara said household debt expanded at a faster pace in the second half of 2019, primarily driven by loans for the purchase of residential properties.

Demand for residential property loans during the period were bolstered by the Home Ownership Campaign launched by the Government.

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-gross domestic product (GDP) correspondingly edged higher to 82.7 percent as at end-2019 amid slower GDP growth, and remained elevated relative to regional peers.

Overall debt-servicing capacity of households, however, continues to be supported by income growth and adequate financial buffers.

At the aggregate level, both outstanding household financial assets and liquid financial assets remained broadly stable at 2.2 times and 1.4 times of debt, respectively.

Household financial assets also continued to outpace the growth in debt for the third consecutive year.

In more recent years, investments by households in unit trust funds (UTFs), including variable price funds have picked up strongly, in contrast to the slower growth in household deposits.

This reflects a search for higher yields, said Bank Negara.

Housing loans

Meanwhile, overall household impairments continued to be driven by residential property loans, which have increased markedly in recent quarters albeit from a low base.

Borrowers with variable income accounted for the bulk of the recent increase in housing loan impairments, reflecting the lower certainty of income experienced by these borrowers.

Risks to financial stability, however, remain contained as exposures-at-risk associated with these borrowers account for only 2.0 per cent of total banking system loans.

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

The central bank said the adoption of responsible lending standards by banks and non-banks have reduced risks of these households falling into financial hardship, which continued to decline in 2019.

Risks among these borrowers nevertheless remain elevated, it said.

- Bernama