Thursday, February 3, 2011

Malaysians have been overborrowing

Should Malaysians be overly concerned with the current level of household borrowings, or do they try to mitigate the escalating prices of food and services and find ways to achieve better wage hikes?





SOME people are concerned with the current level of household borrowings which is about three quarters of the gross domestic product (GDP), while others, including Bank Negara Malaysia (BNM), believe otherwise.


At the end of September last year, total household credit stood at RM475 billion. This represents slightly less than 80 per cent of the the value of all goods and services produced in the country or GDP.

About half of that is for home purchases. This is followed by car loans, personal loans, credit cards and others.

For many years, the household debt-to-GDP averaged about 65 per cent until 2007, when it started to rise at an average of 9.5 per cent a year.

Some economists are concerned with the household debt level given the anticipated lower economic growth this year and rising inflation, albeit moderately. This, they believe would affect loan repayment when real disposable income starts to shrink.


It was reported that the ratio of household debt to personal disposal income in Malaysia reached 140.4 per cent in 2009, which was higher than Singapore's 105.3 per cent and the US 123.3 per cent. This indicates that Malaysians have been overborrowing, where they owe more than what they earn.

Some are worried about an emerging property bubble and its impact on the banking system. Before 1997, the share of household credit was relatively small compared with business loans.

At the end of 1997, lending to the corporate sector accounted for 67 per cent of total loans outstanding. From 2000 onwards, consumer financing has grown considerably - at double-digit annually - that by end of 2007, household borrowings accounted for 56 per cent of total bank loans.

During the period, mortgages remained the bulk of total household debt, growing an average of 15 per cent annually - a growth attributed to government efforts to promote homeownership and the willingness of financial institutions to finance residential purchases as such loans are typically viewed as low risk.

Against the current relatively low interest rates in Malaysia and easy credit for borrowers, some economists believe the household debt-to-GDP is likely to rise beyond a manageable level, if measures are not put in place. They are calling for stringent measures for multiple purchases in addition to the 70 per cent loan-to-value ratio for the purchase of third house.

Now, why does BNM governor Tan Sri Dr Zeti Akhtar Aziz maintain that the current household debt level is not excessive?

According to her, the current debt level is not a concern and the central bank has mechanisms to deal with it. 

She said the local banking system is supported by stronger risk management and governance processes amid low levels of non-performing loans (NPLs). Currently, the NPL for household is 2.3 per cent, while for the overall banking sector is 2 per cent.

As we shouldn't take the figures at face value, we need to see how the household debt reached its level today.

Firstly, Malaysia has a large group of working population. These young people, who are begin ning their careers, would take up multiple loans as they buy houses and start families.

Secondly, household incomes are bigger today as both spouses are working amid steady wage growth over the years. Then, higher home prices require bigger mortgages and banks, facing keen rivalry, offer easy credit.

RAM Holdings Bhd group chief economist Dr Yeah Kim Leng said the current household borrowings level is reasonable because the proportion to total bank loans has been around 55 per cent for the past five years.

"And there was no sharp jump," he said, suggesting that the current household debt-to-GDP is a "new normal" level.

Yeah said a credit crisis is less likely to happen in the country because unlike those in the US or Europe, Malaysians customers do not rely on foreign funds.



BNM statistics show that since early 2000, household sector's financial assets - cash deposits, cheques, loans, accounts receivable, mutual funds, bonds and shares - remained more than double household debt.

This means households have no problems servicing their debts.

Over the years, net worth and income in the household sector have also increased, supported by stable employment and favourable economic environment.

Perhaps we are too preoccupied with the household debt figures that we neglect other issues affecting Malaysians such as inflation.

Although economists say that asset and consumer price inflation are under the lid in Malaysia, people in the street have been feeling higher food and services prices since last year. The impact is most felt among those in the lower-income bracket, especially if their salaries stay stagnant.

Purchasing power is weakened when they can no longer buy the same quantity of goods with the same amount of money.

Lower purchasing power would also bring down demand for goods and services, which would affect production level. This would discourage private investment and could result in shrinking job opportunities.

Lower purchasing power, steep food prices and higher interest rate may affect household sector's ability to meet loan repayment.

Now, should we be overly concerned with the "new normal" household borrowings level, or do we try to mitigate the escalating prices of food and services and find ways to achieve better wage hikes?


By: Hamisah Hamid, Business Times




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