Malaysia's household debt-to-GDP ratio at new peak of 93.3% as at December 2020, says BNM

KUALA LUMPUR (March 31): Bank Negara Malaysia (BNM) said today Malaysia's household debt-to-gross domestic product (GDP) ratio had risen to a new peak of 93.3% as at December 2020, from the previous record high of 87.5% in June 2020, mainly due to the country's GDP remaining below pre-Covid-19 crisis levels and as growth in the nation’s household debt normalised to pre-pandemic levels in the second half of 2020 (2H20) as the country emerged from stringent movement control restrictions.

In BNM’s Financial Stability Review for Second Half 2020 report released today, the central bank said that a concern over high household debt is that it may lead to rapid deleveraging by households in the aftermath of a crisis, thus dampening or derailing the economic recovery.

"There has not been significant evidence of this, with new banking system disbursements to households reaching 112% of their corresponding levels in the same period last year. These disbursements have been mainly extended to middle- and high-income borrowers (71%) who can still afford to take on more loans. 

"Among lower-income borrowers, measures over the years to encourage more responsible borrowing behaviour have partly mitigated the more adverse impact on their finances. 

"Lending continued to be underpinned by sound underwriting standards, with stable overall median debt service ratios for outstanding and newly-approved loans of 35% and 43% respectively,” BNM said.

According to BNM today, household debt growth in 2H20 was mainly driven by car and housing loans, which expanded 6.1% and 7.4% from a year earlier respectively, lifted by strong response to the sales and service tax incentives for the purchase of cars and various homeownership incentives. 

Personal financing also registered a higher annual growth of 7.1%, partly due to the suspension of repayments during the automatic loan moratorium period, BNM said.

"Recent shocks underscored the importance of households accumulating financial buffers during good times. These buffers allow households to tide over periods of economic displacement, thereby alleviating the impact on consumption and debt serviceability. 

"For the vast majority of household borrowers, financial buffers remain broadly intact. Financial asset growth continued to outpace that of debt, driven by sustained deposit growth and a recovery in unit trust and equity holdings.

"This indicates that in aggregate, households still managed to grow their financial wealth during this period. Consistent with these trends, in 2H20, repayments by households in the banking system reached 93% of levels observed in the corresponding period of the previous year, indicating that most have resumed repayments,” BNM said.

BNM, however, said that those earning less than RM3,000 monthly remain stretched financially, with low financial buffers and substantially higher leverage. 

Borrowers earning less than RM5,000 monthly also appear to be showing some signs of financial stress as observed from the profiles of households seeking repayment assistance, according to BNM.

“These borrowers are likely to face continued challenges in 2021 given an uneven recovery in the labour market. However, banks remain resilient against risks from the household sector even under scenarios of assumed higher unemployment and underemployment affecting more household borrowers.

"With Targeted Repayment Assistance measures that have remained in place, household impairments and delinquencies in the banking system only marginally increased after the end of the blanket auto moratorium.

"Banks have continued to actively engage borrowers, particularly those in the lower-income groups and in more-affected employment sectors, such as hotels, restaurants, transportation and construction, to provide repayment assistance aligned with borrowers’ financial circumstances.

"Notwithstanding this, the share of household loans in Stage 2 increased to 7.3% (June 2020: 5.6%), reflecting increased credit risk among household borrowers. Household asset quality is still expected to see some deterioration throughout 2021, but the credit losses materialising are projected to be within banks’ buffers,” BNM said.

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