Credit bubble imminent as Malaysia’s household debt rises


BY ZURAIRI AR
MARCH 22, 2013

KUALA LUMPUR, March 22 — Malaysia risks being mired in a credit bubble which is looming in Asia’s emerging economies, according to several new reports today.

This comes even as Bank Negara Malaysia (BNM) is working intensely to keep the country’s household debt at a manageable level after its ratio to gross domestic product (GDP) rose up to 80 per cent last year.


Zeti said the central bank was supervising the country’s household debt.
“Based on a summary indicator of credit bubbles comparing credit stock levels and credit growth, Coface estimates that emerging Asia is the region most at risk,” said a report by credit insurance firm Coface Group.

The firm included Malaysia among the emerging markets at risk, together with Thailand, Singapore, China and Taiwan.

Coface noted that expansionist monetary policies, which were put in place after the 2008-2009 crisis and failures in prudential controls, have caused a sustained growth in bank credit in these economies.

Royal Bank of Scotland (RBS) analyst Sanjay Mathur was quoted in a media report today as saying that credit has grown “vigorously” in Asian economies, raising concerns that the markets are becoming overly dependent on credit.

Mathur highlighted that in Malaysia, along with Hong Kong in Singapore, household debt has gone above 65 per cent of GDP, while credit has risen, especially in neighbouring Singapore and Thailand.

The analyst was concerned over the growing credit’s pace, since a sharp increase in credit over a short period could affect asset quality if interest rate or income shocks befell the economies.

“Though banking systems are well-capitalised in these countries and we see no immediate problems, the risk is that a rise in interest rates, a slowdown in household income growth or a drop in property prices could restrain consumption growth,” Mathur told The Straits Times.

On Wednesday, Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz had said that the central bank was supervising the country’s household debt, and lending measures have been tightened after the household debt to GDP ratio hit 80 per cent last year.

Zeti gave an assurance that non-performing loans in the household sector remained at only 1.5 per cent, and repayments stayed strong.

“While personal financing by non-banks grew 30 per cent compared with nine per cent seen in banks, the financing by non-bank entities was supported by automatic salary deduction schemes for individuals with stable employment,” she said when presenting Bank Negara’s Annual Report 2012.

An economist however noted today that household debt-to-GDP ratio might even increase this year since household loan was estimated to grow at a faster rate of 11 per cent compared to the nominal GDP growth at 7.8 per cent.

RHB analyst David Chong told The Star Biz that household borrowing last year had still exceeded the GDP growth of 6.4 per cent although it has decreased to 13 per cent compared to 13.4 per cent in 2011.

The bulk of the growth was contributed by the non-bank financial institution segment (NBFI) such as Bank Rakyat Sdn Bhd and Malaysia Building Society Bhd (MBSB), as concern grows over their lending to the lower-income segments.

Despite accounting for only 12 per cent of total household credit, NBFI and development financial institutions (DFI) account for 57 per cent of personal financing credit, a figure which has risen significantly.

This has caused an increase in the percentage of personal financing over household debt from 16 per cent in 2011 to 17 last year.

Malaysia’s household indebtness has increased from 70.5 per cent in 2011 to 80.5 per cent last year, prompting calls for vigilance from financial analysts in the region.