Tuesday March 20, 2012
Household debt rise a concern
By DALJIT DHESI
PETALING JAYA: While not an imminent danger, the level of household debt is of concern and warrants close monitoring, RAM Ratings head of financial institution ratings Wong Yin Ching said,
The nation’s household debt as a percentage of gross domestic product (GDP) had risen to 77% as at end-2011 compared with 69% at end-2006, and its household debt-to-GDP ratio was considered high when compared with other countries in the region, especially in relation to GDP per capita.
Wong was speaking to StarBiz after the release of the rating agency’s Banking Bulletin 2012. Home loans remained the largest component, contributing about 45% of the total household debt, she added.
However, unsecured financing in the form of personal loans and credit-cards had been growing rapidly, accounting for about 15% and 5% of total household debt, respectively.
Development financial institutions, cooperatives and building societies that offer personal financing facilities to civil servants under salary-deduction schemes contributed to the bulk of the growth, she noted.
“We view positively Bank Negara’s various pre-emptive measures implemented since late 2010 to rein in growth in household debt and safeguard the soundness of the financial system.
“On top of the tighter measures on residential property financing, stricter guidelines have also been implemented on credit cards, such as increasing the income eligibility criteria.
“We do not discount additional prudential regulations to be imposed in future,” Wong said.
Effective Jan 1, banks are required to use net income calculation method instead of gross income when computing debt-service ratio.
Wong added that unemployment rate was still relatively low at 3% and the credit quality of household sector was also healthy, with a low gross impaired-loan ratio of 1.8% as at end-January 2012 (end-2010:2.3%).
Nevertheless, she said the debt-servicing ability of households in the lower-income segment might be more vulnerable to economic down-cycles, greater variability in income and inflationary pressures.
On loan growth, RAM Ratings expects the overall banking system’s loan growth to taper to about 8% to 9% this year, after clocking in a strong 14% expansion in 2011. This is supported by a projected 4.6% real GDP growth this year, which is slightly lower than the 5% in 2011.
Private investments, she said were expected to remain strong, although a weakening in global demand would have some bearing on export performance.
Wong anticipates the central bank to remain accommodative in its monetary policy by maintaining the overnight policy rate at 3% with a downside bias in 2012, as preserving growth momentum would take precedence over curbing inflationary pressures.
While a more moderate household loan growth was anticipated due to the prudential regulations introduced, she added this would be balanced by stronger financing demand from the commercial and corporate sector from the rollout of projects under the Economic Transformation Programme and 10th Malaysia Plan.
For non-performing loans this year, she said the industry’s gross impaired-loan ratio was expected to be kept healthy this year, with a slight uptick to about 3% from the current all time low level of 2.7%.
“In terms of capitalisation, all the domestic, all the domestic banks were well poised to meet the new capital requirements under Basel III, of which the implementation would be phased in from 2013,” she added.
Although these new capital measures would elevate banks’ funding costs, which may in turn be passed on to consumers, it would ensure the banking sector was safeguarded against unexpected shocks, Wong said.
As at end-January, the banking system’s capitalisation was strong with a tier-1 risk-weighted capital adequacy ratio of 12.9%.
Banks’ profitability, she said had been on a steady rise over the last couple of years on the back of strong loan growth, benign loan impairment charges and growing fee income. However, net interest margins (NIMs) had been under pressure due to stiff price competition, particularly in certain loan segments such as residential mortgages.
NIM is a measure of the difference between interest income generated by banks and interest paid out to depositors.