Malaysia Tighter Lending Policies

Tighter lending policies have played a key role in mitigating risks to household debts, according to Bank Negara’s Financial Stability and Payment Systems Report 2016.

To continue reducing risks, the central bank said continued vigilance in lending practices must be maintained as well as support for households to effectively manage debt through sustained education and debt assistance programmes.

“Measures such as improvements to public transportation that will reduce the need for borrowings to purchase vehicles and increase income earning opportunities will be important to complement continued vigilance in ensuring responsible financing practices by lending institutions.”

It said further studies on the relationship between debt service ratio (DSR) and default probabilities may provide guidance on indicative levels of prudent threshold of DSR level for different income groups.

“This could contribute towards financial institutions’ credit underwriting, risk management and loan loss provisioning practices.”

The central bank added that this could also contribute towards greater differentiation of borrowers’ credit risk profile based on the DSR level across age and income groups, geographical location and type of financing facility.

“For the bank, through the application of proportionality of regulations, this can reduce potential unintended consequences (such as reduced access to financing for eligible borrowers) of broad macroprudential policies.

“In addition, further studies can better inform the design and calibration of stress test scenarios and parameters to assess the shock absorption capacity across borrowers and lenders.”

According to the report, the largest share of debt (about 40%) is owed by individuals in the top 20 income group (individuals earning more than RM8,000 per month) as at end-2015.

“The average debt level for borrowers in this group is more than twice that observed for other borrower groups. The debt servicing capacity of this group is reasonably healthy as indicated by more prudent debt service ratios.

“Relative to other income segments, a large share of this debt is secured, with about 77% of debt taken out for the purchase of properties and principal-guaranteed investments which contribute towards individuals’ wealth accumulation.”

Bank Negara said borrowers in the more vulnerable income segments, represented by individuals in the bottom 40 income group, accounted for only 11.4% of total debt.

“Borrowers in this group are more likely to face difficulty servicing their debt in the event of a payment shock, given thinner buffers.

“This is somewhat mitigated by the lower proportion of debt financed under floating or variable rate schemes compared to other income groups.

The reports said more than half (53%) of borrowings by this group, however, remained sensitive to changes in interest rates, which could have a disproportionate impact on debt repayment capacity given the low absolute income levels.