Slowing household debt growth shows credit curbs working, BNM says

Bank Negara Malaysia Governor Tan Sri Zeti Akhtar Aziz gives a press conference in conjunction with the release of third quarter GDP figures in Kuala Lumpur November 15, 2013. — Picture by Saw Siow Feng
Bank Negara Malaysia Governor Tan Sri Zeti Akhtar Aziz gives a press conference in conjunction with the release of third quarter GDP figures in Kuala Lumpur November 15, 2013. — Picture by Saw Siow Feng

KUALA LUMPUR, Nov 15 — With local households piling on debt at a slower rate, Bank Negara Malaysia (BNM) today insisted that its measures to rein in the worrying growth were working as intended.

This comes as the central bank announced today that the rise of the household debt-to-gross domestic product (GDP) ratio has eased slightly to 2.5 per cent in the third quarter of 2013, compared to 3.2 per cent in the preceding period.

“The moderation suggests that the macro-prudential measures introduced July this year are beginning to take effect with gradual adjustments as intended,” BNM Governor Tan Sri Dr Zeti Akhtar Aziz told reporters here.

“The approach that we had taken was for the measures to be introduced incrementally so that it does not result in over-adjustment on our financial system and our economy.”

In July, BNM had introduced three new measures to curb Malaysia’s rising household debt, which included reducing the maximum tenure for personal loans to 10 years, restricting home loans to no more than 35 years, and prohibiting offers for pre-approved personal loans.

Responding to concerns that non-banking financial institutions (NBFIs) are spared from the control measures, Zeti explained that the Financial Services Act 2013 and Islamic Financial Services Act 2013 are already in place.

“These legislations allow us to introduce measures to the non-banking financial institutions ... We don’t want to have a heavily regulated banking system and then all the lending gravitates to the non-bank financial system,” Zeti added.

She also explained that there is already a regulating committee for the NBFIs comprising herself, a deputy governor of the BNM, and representatives from the Ministry of Finance, Securities Commission, and the Cooperative Commission, among others.

“This is important because we already have a high household indebtedness. Although the non-performing loans are still very low, this is not a desirable trend,” she added.

Although non-banking financial institutions (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 percentage of personal financing over household debt from 16 per cent in 2011 to 17 per cent last year.

In recent months, economists 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.

Bank Negara Malaysia (BNM) reported in March that 80 per cent of personal loans from NBFIs, which are not supervised by the central bank, goes to government employees with household incomes of less than RM3,000 a month.

The NBFIs include, among others, Bank Rakyat Sdn Bhd and Malaysia Building Society Bhd (MBSB), and development financial institutions (DFIs) such as Agrobank, SME Bank and Lembaga Tabung Haji.

In March this year, several reports had warned that Malaysia risks being mired in a credit bubble which is looming in Asia’s emerging economies, together with Thailand, Singapore, China and Taiwan.

Malaysia’s household debt-to-GDP ratio rose from 75.8 per cent in 2010 to 76.6 per cent in 2011, and to 80.5 per cent in 2012, which is one of the highest in the region.

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