Bank Negara moves to cut household debt

PETALING JAYA, July 5  — Bank Negara Malaysia (BNM) today announced immediate measures to arrest the country’s soaring household debt problem, including tightening lending procedures by narrowing loan tenures for personal financing and property purchases.

The central bank put a cap on personal loan tenures to 10 years and a maximum of 35 years for the purchase of residential and non-residential properties, StarBiz reported this afternoon.

Pre-approved personal financing products have also been prohibited.

According to StarBiz, the new tenures will only apply to loan applications submitted after today.

Quoting BNM, the daily reported that the new measures were taken to rein in the steady growth of household debt levels, which have been averaging at 12 per cent annually for the past five years.

“While this has been supported by positive income and employment conditions, in the more recent period, there has been a growing trend in offering financial products that are not in the long-term interest of consumers.

“This includes extended financing tenures of up to 45 years for house financing and 25 years for personal financing,” BNM was quoted saying.

Malaysia’s household debt to GDP ratio has been steadily increasing from 75.8 per cent in 2010 to 76.6 per cent in 2011 and to 80.5 per cent in 2012.

In March, BNM governor Tan Sri Dr Zeti Akhtar Aziz said the central bank was supervising the country’s household debt after the ratio breached the 80 per cent mark last year.

UK newspaper Financial Times reported in May this year that Malaysia’s household debt is now top in the region, making the developing country vulnerable to financial instability.

BNM also said it would continue engaging with shareholders and the management of non-bank financial institutions or NBFIs, which have been partly credited for the hike in household debts, owing to loose lending criteria and strong growth in personal financing credit.

News portal The Malaysian Reserve reported BNM as saying last March that 80 per cent of personal loans by NBFIs, which are not supervised by the central bank, goes to civil servants with household incomes of less than RM3,000 a month.

Although NBFIs and development financial institutions (DFIs) only account for 12 per cent of Malaysia’s total household credit, they are responsible for 57 per cent of personal financing credit, a figure that has risen significantly.

The comparative ease of obtaining personal loans has increased the the percentage of personal financing over household debt from 16 per cent in 2011 to 17 per cent last year.

The Malay Mail Online reported on Tuesday that civil servants, the usual targets of NBFIs, are now finding themselves spiraling deeper into debt as more among them opt to take out hefty personal loans to finance their daily needs and indulgences.

Interviews with government workers found many have zero savings to cushion their fall in times of financial emergencies but their loan application approval comes with great ease mainly due to their job security and the easy availability of personal financing offered by the NBFIs.

In recent months, economists have stressed the need for stricter supervision on NBFIs that issue personal loans primarily to civil servants, voicing concern about the vulnerability of low-income households to economic shocks.