KUALA LUMPUR, July 5 (Bernama) -- Bank Negara Malaysia (BNM) is implementing a set of measures, effective immediately, to curb the rising trend of household indebtedness and to reinforce responsible lending practices by key credit providers.
Governor Tan Sri Dr Zeti Akhtar Aziz said the measures were limiting maximum tenure of personal loans to 10 years and properties financing to 35 years, and prohibition on the offering of pre-approved personal financing products.
Also included was the setting of prudent debt service ratio that allowed sufficient buffer to deal with income volatility and other costs, she said.
Zeti said as of March this year, the ratio of household debt to gross domestic product (GDP) in Malaysia grew by 13 per cent to 83 per cent from 70 per cent in 2009, the highest level for developing countries in Asia.
"Given that the economy is now growing in the range of four to six per cent, we believe this level of indebtedness is not sustainable and that is why we are introducing these measures," she told a media briefing here Friday.
She said compared household debt to GDP in other developing Asian countries, Thailand stood at 30 per cent, Indonesia 15.8 per cent, Hong Kong 58 per cent, Taiwan 82 per cent, Japan 75 per cent and Singapore 67 per cent.
Zeti said the countries that have higher household debt to GDP were the US at 91.7 per cent, Australia 113 per cent, New Zealand 91 per cent, UK 114 per cent and South Korea 91 per cent.
The governor said central bank was putting in place responsible borrowing lending practices and prudent borrowing behaviour by the household sector.
She said the measures were aimed at ensuring a more sustainable household sector over the medium term, and gave an assurance that the sector contribute to growth of Malaysian economy in a sustainable manner.
"We decided to focus on household sector for these measures, so that there will be no confusion in the outcome that we want to achieve, which is sustainability of the household sector because it is such an important driver to our economy," she said.
Zeti said one of the factors contributing to the higher pace of household debt was the rising trend of personal loans which increased at an annual average rate of 20 per cent.
She said the rising role of non-bank financial institutions, which were supplying nearly 60 per cent of the personal financing to the households, was also a contributing factor.
"Of the total financing, 16.9 per cent are personal financing. In terms of growth rate of personal financing by non-bank financial institutions, last year it grew 29 per cent compared to the banks which grew 9.1 per cent.
"Aggressive competition in personal financing market has also contributed to lower financing rate that are not reflective of the associated risk," she said.
On the lengthy loan period, she said, while the longer tenure might reduce the monthly repayment, in the long run it will increase the overall debt burden of households.
Using housing loans as example, she said: "The tenure of housing financing has been lengthened to 45 years, though the monthly installment might be lower, but in the end it will cost 20 per cent more."
She added that such a practice encouraged excessive debt accumulation by households and increased the vulnerability of the sector.
Zeti said BNM has also urged financial institutions to give greater emphasise on affordability assessment as compared to repayment history and collateral which largely dominated the lending decision even when affordability assessment indicated potential future vulnerability.
"The affordability assessment is still not as robust as what we want to see.
"Our recent supervisory review of financial institutions' compliance with the guidelines are falling short of expectations, in a number of respect, resulting in lending decisions that are inconsistent with the obligation to ensure that financial products offered are affordable," she said.
Complementing the responsible lending guideline which was issued last year, the new measures applied to all financial institutions regulated by BNM, credit cooperatives regulated by the Suruhanjaya Koperasi Malaysia, Malaysia Building Society Bhd and Aeon Credit Services (M) Bhd, she said.
She said the limits on financing tenure will not affect applications made before today.
Extracted from BERNAMA, July 5, 2013
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