PETALING JAYA: Favourable labour market conditions and the continued availability of loan repayment assistance for viable borrowers are expected to continue lending support to overall household debt-servicing capacity, says Bank Negara.
In its “Financial Stability Review for the Second Half of 2023” (FSR2H23), the central bank said government support measures for vulnerable households are also anticipated to continue to strengthen the ability of households to service their debts efficiently.
Revealing that household debt had grown at a faster pace in 2H23 amidst sustained improvements in the labour market and economic activity, it commented that overall debt growth had continued to be driven largely by housing and car loans.
“These two loan categories collectively make up almost 73.7% of total household debt,” it said, before adding that the growth in housing loans reflects general improvements in residential property market activity, further supported by the continued availability of stamp duty exemptions or remissions for first-time home buyers.
According to the report, car loans had also remained on an upward trend, on the back of higher car sales following promotional campaigns and new model launches, including electric vehicles, during the period in review.
Unsecured debt, such as personal and credit card debt that are taken up by households also increased in 2H23, although its share of overall household debt has, however, remained broadly unchanged at 15.5% of total household borrowings.
With the rise of unsecured loans, Bank Negara reported that growth in outstanding credit card debt had also been consistent with the ongoing recovery in consumer spending.
Furthermore, it elaborated that prudential requirements remain in place to ensure that new credit card applications are subject to affordability assessments and appropriate credit limits.
“In line with these observations, credit card cash advance transactions remained low at 1.3% of total card transactions, especially compared with the 2015 to 2019 average of 2.2%.
“Revolving balances, as a proportion of outstanding credit card balances, also continued to trend lower to 47.9%, while loans for the purchase of securities also continued to decline,” it said.
Bank Negara commented that the decrease was driven primarily by lower Amanah Saham Bumiputera financing, as the narrowing spread between financing and dividend rates led to higher redemptions and lower new demand for such loans.
Crucially, as at December 2023, the central bank pointed out that the ratio of household debt-to-gross domestic product (GDP) and the ratio of banking system household debt-to-GDP remained elevated at 84.2% and 69.5%, respectively.
Despite this, it commented that households had generally displayed resilience, as 70.9% of household banking system debt is held by middle and higher-income borrowers with a monthly income of RM5,000 or more.
The overall median debt-to-income ratio was stable at 1.4 times, as banks maintained sound lending standards while other measures such as the debt servicing ratio (DSR) also point to sustained debt-servicing capacity.
“In 2H23, the DSR of newly approved and outstanding household loans stood at 41% and 35%, respectively, maintaining stability from 1H23, signifying healthy buffers for households to meet their loan obligations.
“Meanwhile, the share of borrowers with DSR exceeding 60% remained broadly unchanged at about a quarter of total household borrowers, while 69% of high-DSR debt is held by middle and high-income borrowers who typically have larger financial buffers to sustain loan repayments in the event of financial shocks,” said the report.
Notably, Bank Negara said house financing continues to account for the bulk of household debt at 60.5%.
This is as lending rates averaging 4.2% on new home financing were below levels observed in the second half of 2019, when it was at an average of 4.4% and the overnight policy rate was at 3% as it is at present.
The central bank said the marginally lower rates have helped support access to financing for new home buyers, as the median loan-to-value ratio of outstanding housing loans remained prudent at 66.6%.
Moving forward, banks are nevertheless expecting a modest increase in impairments as repayment assistance programmes are progressively reviewed, according to the report.
This is because persistent cost pressures could begin to weigh more heavily on the debt-servicing capacity of a small segment of borrowers, it noted.
That said, the central bank expects higher potential losses to remain comfortably within banks’ provisioning buffers, as the vast majority of borrowers continue to show improvements in their debt-servicing ability.
Overall, the banking sector is remaining firmly resilient to potential stress from the household sector in the unlikely event that ongoing challenges faced by some borrowers become more widespread.
According to the FSR2H23 report, the latest stress test conducted by Bank Negara shows that up to 4.8% of total banking system loans could be at risk of default by end-2026, if household borrowers experience severe labour market shocks with the unemployment rate reaching as high as 6%.
“This would continue to remain comfortably within banks’ excess capital buffers,” it added.
