KUALA LUMPUR (Oct 14): Household debt moderated to 4% in the first half of 2020 (1H20), compared with 5.5% a year ago, amid nationwide movement restrictions and lower discretionary purchases as households turned more cautious amid the Covid-19 pandemic. 

Bank Negara Malaysia’s (BNM) said in its 1H20 Financial Stability Review report that the slower growth was mainly reflected in weaker loan growth for purchases of residential properties and motor vehicles in the period, which recorded rates of 7.2% and -0.9% respectively, compared with 8.5% and -0.4% last year.

Despite slower growth in debt, the household debt-to-gross domestic product (GDP) ratio rose above its previous peak of 86.9% in 2015 to 87.5% as of June 2020 due mainly to a sharp contraction in nominal GDP in the second quarter.

This ratio, however, is expected to decline as economic activity improves and households gradually resume loan repayments, said BNM.

“Although household debt levels remained elevated, households were generally still borrowing within their means as reflected by the prudent overall median debt service ratios for outstanding and newly-approved loans of 35% and 43% respectively,” the central bank said in the report.

The central bank said at the aggregate level, most households are expected to remain reasonably resilient despite the impact of the Covid-19 pandemic on household income and employment prospects. 

“Households continued to maintain comfortable levels of financial assets and liquid financial assets (LFAs) at 2.2 times and 1.4 times debt respectively as relief measures introduced by the government and BNM released extra cash to households,” said the report. 

Nonetheless, BNM noted that some households were facing increased financial stress. It said household leverage increased the most among borrowers earning less than RM5,000 per month during 1H20, especially amid income prospect uncertainties.

“The higher leverage was mainly attributable to an increase in borrowings for purchases of homes earlier in the year and in June following the reintroduction of the Home Ownership Campaign (HOC),” BNM noted.

It said despite expectations for labour market conditions to improve going forward, borrowers with variable income or employed in more adversely impacted sectors will also likely face continued challenges.

“For these borrowers, the targeted assistance extended up to the first quarter of 2021 will provide further temporary financial relief, while government measures such as the wage subsidy and reskilling and upskilling programmes will serve to improve future employment and income prospects. This, in turn, will support debt serviceability,” it said.

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