‘Individuals at risk to income shocks’

PETALING JAYA: Individual borrowers are likely to be more vulnerable to income and expenditure shocks if they earn less than RM5,000 per month and have a debt service ratio (DSR) level of above 60%, according to a study by Bank Negara ().

The study looks at monthly disposable income and liquid financial assets (LFA), after deducting debt repayments and expenditure on basic necessities.

The study titled “Indebted to Debt: An Assessment of Debt Levels and Financial Buffers of Households” also reveals that individual borrowers earning more than RM3,000 per month have sufficient financial buffers, based on a conservative assumption that LFA is more than total debt.

The bulk (69%) of Malaysian household financial assets are liquid, of which more than two-thirds are in deposits and unit trust funds.



Across income groups, LFA are mostly held by individuals with monthly earnings of more than RM5,000. Individuals earning less than RM3,000 per month have a LFA cover of less than one time (0.6 times) of their outstanding debt.

“This group of borrowers (earning below RM3,000) account for 20% of household debt, with a majority (56%) living in urban areas and one in five having a DSR of more than 60%.”

The inclusion of housing wealth, such as the disposal of residential property, would however provide sufficient cover of debt for this group.

The study found that a significant majority of borrowers are less vulnerable to unexpected income and expenditure shocks.

Meanwhile, the study shows that the impact of a higher cost of living is lower compared with an income shock.

“When expenditure rises by 20%, share of total borrowers with negative financial margin increases by 3.1 ppt from the baseline. This largely affects those living in urban areas who are subject to higher living expenses.”

BNM noted that Malaysian household debt growth has been moderating for seven consecutive years to 4.9% as at end-2017. The ratio of household debt-to-GDP declined to 84.3% from the peak of 89% in 2015.

It said risks to financial stability posed by household indebtedness remain manageable despite the existence of pockets of risks, and banks continue to have sufficient capital buffers to withstand potential losses arising from the household sector, even under severe macroeconomic and financial shocks.



Under the stressed scenarios, the potential losses to the system from credit exposures to borrowers with negative financial margin due to income, cost of living and cost of borrowing shocks are estimated at between RM66 billion and RM103.8 billion.

“Despite the severity of these shocks, banks are able to withstand the potential losses, which remain within banks’ total excess capital buffer of RM124.5 billion.”

In view of high property prices, BNM said more could be done to ensure renting becomes a viable alternative for households.

“A conducive rental market would provide borrowers the option to rent rather than incur more substantial debt and expenditure burdens associated with owning a home.”

Other measures include encouraging and takaful coverage as a safety net; promoting responsible lending behaviour; and enhancing financial literacy.

Despite high household debt levels, the said more measures to rein it in are not warranted given continued moderation in household debt expansion, declining household debt-to-GDP ratio and prudent debt service ratio level.

Source: The Sun Daily







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