By Stephanie Jacob
With household debt growth levels slowing along with house prices, we are hearing suggestions that the central bank should start easing some of its macroprudential measures. Bank Negara Malaysia however, think they are still more than necessary to keep household debt in check — rightly so.
Real Estate and Housing Developers Association (Rehda) recently asked Bank Negara Malaysia (BNM) to ease its macroprudential measures which were implemented a few years ago, aimed at curbing the rising level of household indebtedness.
Last week, Rehda president Fateh Iskandar Mohamed Mansor, commonly known as FD Iskandar, said feedback from its members indicated a decline in sales performance, and said this contraction was partially due to the difficulty in obtaining end-financing for buyers.
Fateh Iskandar Mohamed Mansor
He said “take-up rates are good but upon signing the SPA (sale and purchase agreement), applying for bank loan, then the rate goes dismal.”
Although Redha said it understood the government’s concern over rising household indebtedness, it opined that more precise curbs were needed to target debts which do not create value, arguing that property mortgages were more productive.
Unfortunately for Rehda, BNM is unlikely to ease its macroprudential measures anytime soon. Just slightly over a week and a half ago, BNM governor Zeti Akhtar Aziz said the central bank had absolutely no plans to reduce the scope of its macroprudential measures.
In fact, the governor was eager to highlight the success of the measures in both slowing the growth rate of household debt, as well as arresting the sharp increase of house prices. She also said that despite the measures, loan growth still remained strong but was now of made up of higher quality debt.
Zeti Akhtar Aziz
She said: “The growth of personal loans used to be something like 25% and it has moderated now to less than 5%….We believe the banks will assess all those who want to borrow based on their affordability, and will give the loan.
“Loan growth has been increasing now by 9.9% to household sector and to the business sector the loan growth is 9% and to the SME (small medium enterprise) sector it is 13.3% – so there is no reason for BNM to roll back our macroprudential programme.”
The governor was clear in emphasising that firstly the measures were working. And secondly there was no chance of a revision or easing in the near future because household debt still needs to come down.
It is hard to argue with the governor’s stance on the necessity of BNM’s macroprudential measures.
When the measures were brought into effect in 2013, household indebtedness was hovering at around 11.5% in terms of growth rate, still alarmingly high despite falling from a high of 15.5% in 2010.
Last year, this rate slowed to 9.9% which BNM said shows the macroprudential measures are working
Furthermore, learning the lesson of the US subprime crisis which triggered the Global Financial Crisis, BNM would have also noted the danger of housing loans being given to borrowers with poor credit scores.
The central bank would have also been looking to reign in non banking financial institutions from which it was easy to secure both housing and personal loans. BNM was especially unhappy about the high amount of personal loans being offered to all and sundry with unreasonably long repayment tenures.
Zeti made her views on personal loans very clear during a recent press briefing when she said “personal loans are usually squandered in several days and the borrower remains indebted over a period of years…for non-banks we have reduced it to 10 years, it used to be 25 years. So the borrower has no assets as a result of this personal loan and then will spend 25 years of their life to repay this debt.”
One of the reasons the non-banks lend so easily especially to civil servants is because they are allowed to automatically deduct monthly repayments and as such have relatively low default rates despite giving loans to relatively higher risk borrowers.
This often seems like a win-win situation at the time, but it is not uncommon especially among civil servants to hear of individuals being left with only a fraction of their salaries at the end of the month.
One of the worst consequences of this is there is almost nothing left to put away as savings for the future or emergencies — case in point is a previous finding by Khazanah Research Institute that some civil servants are paying up to 60% of their monthly income in debt obligations.
And while the stringent measures have sometimes made it challenging for genuine buyers, especially first time house buyers to get loans, they have also succeeded in reducing property speculation and have contributed in slowing the growth of house prices, as noted by BNM earlier this month.
Recall that according to BNM’s Financial Stability and Payment Systems Report 2014, aggregate house prices had been seeing three consecutive quarters of slower growth since the last quarter of 2013 and BNM expects the fourth quarter of 2014 to see the same moderating trend based on preliminary data.
It is also worth remembering that the household debt level remains a key concern of credit rating agencies which often cite it as either a barrier for a positive re-rating or a potential cause of a downward revision.
BNM’s measures might be tough but they are more than necessary to both avoid placing unnecessary strain on the country’s financial and banking systems, to keep household debt at a manageable level and to prevent Malaysians for being burdened by mountains of debt.
They were the right measures to implement, and for now, remain the right measures to keep.
GRRRRR!!!
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