By DALJIT DHESI
This is possible if the external headwinds continue and impact growth
PETALING JAYA: Household debt to gross domestic product (GDP) ratio is expected to further balloon by 1 to 3 percentage points from its current level of about 78% if the external headwinds continue and impact the growth of the domestic economy.
The rise in household, debt analysts said, could impact banks' profitability with the recent Bank Negara's guidelines to contain surging household debt with stricter policies for loans and credit cards, hence restricting overall loans growth.
Household financing facilities currently account for the bulk of the local banking system's loans at more than 55%.
MIDF Research chief economist Anthony Dass told StarBiz that the risk of an economic slowdown in Malaysia was still there amid the global economic uncertainties and eurozone debt crisis.
He said the research house was projecting a 4.8% GDP growth next year and if the external headwinds persisted and the domestic economy did not improve by the Government's pump priming activities, household debt to GDP ratio could be maintained at current levels or could inch up by another 1 and 3 percentage points.
Supporting the view, Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias said in terms of its ratio to the country's output, Malaysia's household debt would likely remain high or even increase slightly in 2012, especially if nominal GDP fails to increase substantially due to a general slowdown in the global economy.
“This will be almost similar to the 2009 experience when Malaysia's household debt as a percentage of GDP soared to 77% from 64% in 2008 when the economy mired into recession. In addition, during an economic slowdown, households tend to stretch their borrowing needs to compensate for their loss of incomes.
“While banking institutions will generally impose stricter lending guidelines during periods of economic slowdown, consumers will likely resort to borrowing from non-financial institutions such as cooperatives, etc. Therefore, we foresee household debt to remain above 70% of GDP next year,'' Zahidi noted.
RAM Holdings Group chief economist Dr Yeah Kim Leng, however, felt with the slew of new measures introduced recently by the central bank to curb over-borrowing, especially by the more vulnerable groups, he expected the country's household debt level in 2012 to stabilise close to 76% of GDP.
It may ease to or slightly below 75% of GDP in 2012 if the annual increase in household debt was capped below 7% and nominal GDP growth was maintained at the current pace of 9%, he noted
Borrowings from banks accounted for 84.2% of total household debt in 2010. In the first 10 months of this year, banks' lending to the household sector grew by 12.6% to RM540.5bil.
A banking analyst from MIDF Research added that he expected household loans to trend downwards with Bank Negara's stricter guidelines on credit cards and new lending guidelines that required banks to use net income to calculate the debt service ratio for loan approvals.
The guidelines, which comes into effect in January next year, cover all consumer loan products including housing loans, personal loans, car loans, credit card receivables and loans for the purchase of securities.
He said the recent Responsible Lending Guidelines to ensure prudent lending to retail sectors would also ensure only those who were eligible to furnish their loans be allowed to obtain financing.
The analyst, who is projecting loans growth to slow down to about 9% next year, said he expected moderation in banks' net profit growth next year. As of October 2011, loans growth was 13.1% year-on-year. For the first 10 months of this year, it stood at about 10.7%.
To cushion the impact of slower loans growth and boost banks profits, he said banks would opt and focus more on low-cost deposits like current accounts and savings accounts rather than fixed deposits.
Analysts also feel that since interest income from loans would be impacted, banks would also focus on non-interest income like fee and investment banking-related businesses to boost their revenue base.
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