BNM: Simulation shows most Malaysian borrowers have enough financial cushion, 1.9pc likely to be most distressed

People shop for groceries at the St Rosyam Mart in Kuala Lumpur September 26, 2021. — Picture by Hari Anggara
People shop for groceries at the St Rosyam Mart in Kuala Lumpur September 26, 2021. — Picture by Hari Anggara

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KUALA LUMPUR, Sept 29 — Many Malaysian households, especially in the middle- and high-income categories, appear able to still take on new loans for purposes such as buying houses and cars, Bank Negara Malaysia (BNM) said today.

In its Financial Stability Review report for the first half of this year, BNM noted that most household borrowers in Malaysia remained resilient, while those that face higher levels of financial stress could access additional buffers through policy support measures.

As of the end of June this year, household debt growth in the country had expanded by 5.5 per cent over the same period last year, as more borrowers resumed paying their loans again after exiting from the loan moratorium, BNM said.

In terms of quarterly growth, however, BNM said it revealed that household debt growth had moderated or reduced during this period, as the previous strong response — to incentives rolled out in the second half of 2020 to own homes and buy cars — have tapered off, while movement restrictions had also weighed down on consumer spending and resulted in a decline in personal financing and credit card loans.

But as a whole, BNM said there was little indication of households sharply reducing their debt.

“At the aggregate level, there is little sign of a sharp deleveraging by households, suggesting that many households continue to have the financial capacity to take on new debt,” it said in the report.

People queue in front of a Bank Simpanan Nasional branch in Klang September 6, 2021. — Picture by Yusof Mat Isa
People queue in front of a Bank Simpanan Nasional branch in Klang September 6, 2021. — Picture by Yusof Mat Isa

Middle, high-income borrowers likely in better position

Amid a more cautious outlook on credit risk, BNM observed that banks have continued lending to households, especially for secured or collateralised loans, with banks’ household lending at a steady 5.2 per cent year-on-year growth.

Excluding credit cards, about 70 per cent of new loans given out by banks in the first six months this year were to those in the middle-income and high-income categories.

“Around 70 per cent of new banking system disbursements in the first half of 2021 continued to be channelled to middle- and high-income borrowers who have greater capacity to take on new debt, with 40 per cent and 20 per cent of total new disbursements going towards the purchase of residential properties and cars, respectively,” BNM said.

BNM said the debt service ratios of both existing and new household loans have remained at a prudent level of 35 per cent and 41 per cent as of the end of June, as compared to 35 per cent and 43 per cent at the end of December 2020. (Debt service ratio refers to the ratio of total monthly bank and non-bank debt obligations to a borrower’s monthly disposable income or nett income.)

For borrowers with a debt service ratio of more than 60 per cent, they are still at about a quarter of the total household borrowers in Malaysia, with 24 per cent at the end of June, which is comparable to 25 per cent at the end of December 2020.

“A significant proportion (66 per cent) of the debt held by these borrowers is associated with the middle- and high-income groups who are more likely to be able to withstand financial shocks,” BNM said.

The overall household debt-to-GDP ratio improved from 93.2 per cent at the end of December 2020 to 89.6 per cent at the end of June, but remains elevated amid the sluggish recovery in nominal GDP, BNM said.

Patrons are seen at a restaurant in Kuala Lumpur September 25, 2021. — Picture by Shafwan Zaidon
Patrons are seen at a restaurant in Kuala Lumpur September 25, 2021. — Picture by Shafwan Zaidon

Borrowers earning less than RM5,000 monthly most vulnerable

The uneven economic recovery in Malaysia is illustrated with how risks in household debts are confined to a “small but deeply stressed” segment of borrowers, such as those who are forced to use their retirement savings and other cash buffers to cope with the financial impact of the pandemic.

BNM examined the levels of financial assets held by households in Malaysia, which covers retirement savings under the Employees’ Provident Fund (EPF), deposits, unit trust funds, equity holdings or shares held, and the cash value of insurance policies when surrendered.

BNM said that household financial assets had recorded an annual growth of 5.4 per cent in June 2021 as compared to 7.2 per cent in December 2020, but that the actual value as a whole had declined by RM3 billion between the period of December 2020 and June 2021.

BNM said the RM3 billion decline was mainly driven by Malaysians’ overall retirement savings becoming significantly lower, due to withdrawals of part of their retirement savings under the EPF’s i-Sinar and i-Lestari programmes.

BNM cautioned that the withdrawal of such savings could in the long term make things more difficult in the future for some Malaysian households that are already likely to have insufficient savings for retirement, citing the EPF’s 2018 Social Protection Insight report where EPF’s study showed two out of three active EPF contributors are projected to have insufficient retirement savings for a minimum monthly pension of RM1,000.

“In the short term, however, the flexibility provided for households to withdraw their retirement savings early has provided an additional source of funds to help them tide over current financial strains,” it said.

In terms of risks, BNM said its simulations — as included in its Financial Stability Review for the first half of 2020 — suggest that there would be a “relatively modest” percentage of household borrowers or between 11 and 15 per cent of borrowers that would have to use their existings savings to pay their loans and for their living expenses over the next 18 months, in the event of income shocks and unemployment.

This simulation was a conservative one that excluded the impact of any policy measures to ease cash flow for borrowers, such as the repayment assistance programmes that kicked in after the first quarter of 2021, their withdrawals from retirement savings, and government’s cash transfers, with the drawdown of buffers simulated from the second quarter of 2020 onwards.

Out of the simulated estimate of between 11 and 15 per cent of household borrowers, BNM estimated that there would be a much smaller share of borrowers (1.9 per cent) who are “most at risk” as they are more likely to deplete or use up all their cash or deposit buffers.

“About two thirds (65 per cent) of such at-risk borrowers comprise those earning less than RM5,000 monthly who were also more highly leveraged compared to other income groups pre-Covid-19,” it said in noting these borrowers had higher debts before the pandemic.

In terms of loans given out by banks, these “most vulnerable” or most at-risk borrowers are estimated to only account for 1.3 per cent of such loans.

“Most household borrowers therefore appear to have sufficient financial buffers and remain reasonably resilient, with policy assistance measures providing additional reserves against potential shocks,” BNM said, adding that this also reflects the banks having conducted more robust affordability assessments in line with responsible lending standards introduced by BNM since 2012.

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