KUALA LUMPUR: The ratio of household debt to gross domestic product (GDP) rose marginally to 87.9% in 2014 from 86.7% in 2013, but it is expected to moderate on entrenched measures moving forward, Bank Negara Malaysia (BNM) said in its annual report released yesterday. 

The central bank said in its financial stability and payment systems report that the aggregate household debt sustained its moderating trend over the past two years, growing by 9.9% to RM940.4 billion as at end-2014 compared with 11.7% the year before.

“The growth in household debt moderated over two consecutive years, underpinned by the continued decline in personal financing by non-bank lenders,” BNM explained.

This was consistent with improved assessments by banks and non-bank financial institutions (NBFIs) of the ability of borrowers to take on additional debt.

The regulator also noted that the healthy aggregate balance sheet of households has continued to lend support to overall debt servicing capacity amid stable employment and income conditions.

On household borrowings, about 80% of new loans have a debt service ratio (DSR) for all outstanding debts of less than 60%, while half have a DSR of less than 40%, it said.

Aggregate household financial asset-to-debt maintained at more than two times, over the past three years.

During the year, aggregate financial assets increased by RM110 billion compared with an increase of RM84.5 billion in debts, it said, adding that deposits and deposit-like instruments contributed to about 57% of the increase in financial assets and represent more than 42% of household financial assets.

Collectively, about 64% of household financial assets are readily available if needed for households to meet higher financial outlays.

Meanwhile, properties remain an important investment class for many households to finance children’s education, provide a form of financial security for the next generation and prepare for retirement.

Over the past five years, borrowings by households to invest in property have been growing at a steady average rate of about 4.7%, BNM said.

This has added to total household assets which expanded by 5.7%. The ratio of total household asset-to-debt has remained high and stable at 3.6 times compared with 3.7 times in 2013.

The amount of new debt assumed by households was RM3.8 billion lower in 2014 than in the previous year. “The borrowings continue to be heavily concentrated in financing secured by property and financial assets, thus reducing the net exposure to households in an event of stress.”

In 2014, households accumulated an additional amount of RM7.3 billion in outstanding credit card balances and personal financing, accounting for less than 40% of the average annual increase in credit card and personal financing recorded between 2010 and 2013.

NBFIs remained the largest provider of personal financing with a share of close to 60% of total personal financing to households, although new personal financing facilities approved by NBFIs declined both in number (-14%) and value (-31.3%) terms.

BNM noted that improvements in loan affordability assessments were evident among NBFIs based on on-site examinations conducted by itself and the Malaysia Cooperative Societies Commission. 

“This has ensured that the quality of personal financing granted to households is kept in check in view of the significant concentration of NBFIs’ portfolio in this segment.”

It added that it remained vigilant over the potential for risks to increase in other segments of the household credit market which are not subject to the macroprudential measures by the central bank. 

In conclusion, the central bank said that as the effects of earlier measures continue to become more entrenched, the pace of growth in household debt should continue to moderate. It further added that the high level of household indebtedness is expected to remain over the next few years given the relatively long average remaining maturity of the borrowings.

The lower growth in house prices, along with the implementation of measures by the government to assist lower income households, should further reinforce a more measured pace of growth in household debt going forward, said BNM.

This article first appeared in The Edge Financial Daily, on March 12, 2015.