PETALING JAYA: Although the latest measures introduced by Bank Negara to rein in household debt would ensure a sound and sustainable household sector, more is needed to prevent debt from reaching alarming levels, said economists.
The household debt in Malaysia, which stands at about 83% of gross domestic product (GDP), is higher than many other countries in the region like the Philippines, Indonesia, Singapore, Hong Kong and Japan. If not prevented, it could put a damper on the country’s 5%-6% projected GDP growth this year.
RAM Holdings Bhd group chief economist Dr Yeah Kim Lengsaid he believes the latest measures, in combination with the earlier ones, would have the cumulative, albeit modest and gradual, effect of crimping household debt.
The latest measures would help to moderate the increase in total household debt, as the earlier responsible lending guidelines introduced last year have only had a marginal impact on slowing down the rise in total household debt to 13.0% in 2012 from 13.4% in 2011.
Certain measures, therefore, have to be in place in combination with the existing ones to ensure the soundness and sustainability of the household sector. “The loan-to-value (LTV), currently at 70% for the third housing loan, and debt-to-income net of all other borrowing measures, could be further tightened. For instance, the 70% LTV could be lowered or applied to the second or first loan, while the debt-to-income could be lowered to 30% instead of 50% of monthly net income,’’ he told StarBiz.
In addition, he said the net income could be defined more stringently to include other obligations of the borrower. To rein in excessive property price increases that have contributed to rising property loan demand, the real property gains tax (RPGT) could be further raised to curb speculative activities, he added.
Other complementary measures needed include efforts to boost housing supply and containing construction cost increases, he said, adding that more blunt monetary measures such as raising the overnight policy rate or banks’ reserve requirements could be applied if the macro-prudential measures applied thus far prove inadequate to contain household debt build-up.
The latest measures by the central bank to curb household debt include imposing a maximum tenure of 10 years for the repayment of personal loans and a maximum of 35 years for property loans, and prohibiting the offering of pre-approved personal financing products.
Apart from this, key credit providers are required to observe prudent debt service ratios in their credit assessment to ensure households have sufficient buffers to protect them against rising costs and unexpected adverse events. The bank’s new measures also bring some of the lending practices at development financial institutions and non-bank financial institutions (NBFIs) in line with those of conventional banks.
Malaysian Rating Corporation Bhd chief economist Nor Zahidi Alias said more measures were needed to curb speculative activities. “Implementing more measures to curb speculative activities in the property market can be positive. This may include a lower LTV ratio for third property purchases, higher stamp duty for property transactions and higher RPGT. All these would help curb speculative activities,’’ he noted.
He said the latest measures by the central bank were positive in view of the serious level of household debt in the country. The growth in personal financing has been robust in the past several years, especially among NBFIs, he said, adding that NBFIs had collectively extended 57% of personal financing credit to households in 2012.
Zahidi said no doubt they are secured by automatic salary deductions (for civil servants), but the rapid surge in the amount of personal financing extended to households would pose some sort of risk to the economy through a possible decline in private consumption in the event of a serious downturn.
He foresees the household debt level beginning to stabilise next year should the new measures begin to take effect in controlling the growth in personal financing. He said no doubt there was still a sizeable amount of loans related to mortgages, but at least, they were backed by underlying assets.
In a recent report, Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz noted that housing loans formed the bulk of Malaysia’s household debt at 44.5%, while 16.8% were personal loans.
(The Star, July 22)