Is BNM Overeacting?

Quick on the heels of restricting credit card issuance and capping of credit lines, comes another Bank Negara measure to reign in bank's capacity to offer loans.

Yvonne Tan and Star online colleague, Sharidan Ali looks into the effects of such measures of bank the banking system and household debt..

Call it responsible lending or whatever, Bank Negara Malaysia (BNM)'s new measures to inculcate responsible lending by banks to retail customers is expected to impact the quantum of credit disbursement as weaker borrowers will be kept out of the lending radar.

Is BNM getting overcautious of household debt management?

From 3Q, 2011, new guidelines on lending would have to be followed. These would be used to stress-test loan applicants using a 100 to 200 basis points increase to evaluate loan repayment ability.

Malaysia's household debt rose at a rapid rate of 11.1% per annum from 2004 to 2009; and from RM516.6bil at end-2009, it climbed by 8.4% to RM560.1bil as at end-August 2010, according to data by CIMB Research.

The household debt to gross domestic product (GDP) ratio increased from 66.7% in 2004 to 76% in 2009 but is estimated to ease to 74.6% at end-2010.

Nevertheless, compared to the entire banking sector's NPL ratio of around 3.1%, the household sector's NPL ratio stood at 2.3% at end-2010.

Anecdotal evidence indicate that bankers are focusing more on the underlying collateral, especially for mortgages and auto loans.
Quick on the heels of restricting credit card issuance and capping of credit lines, comes another Bank Negara measure to reign in bank's capacity to offer loans.

Yvonne Tan and Star online colleague, Sharidan Ali looks into the effects of such curbs.

Call it responsible lending or whatever, Bank Negara Malaysia (BNM)'s new measures to inculcate responsible lending by banks to retail customers is expected to impact the quantum of credit disbursement as weaker borrowers will

be kept out of the lending radar.

Is BNM getting overcautious of household debt management?

From 3Q, 2011, new guidelines on lending would have to be followed. These would be used to stress-test loan applicants using a 100 to 200 basis points increase to evaluate loan repayment ability.

Malaysia's household debt rose at a rapid rate of 11.1% per annum from 2004 to 2009; and from RM516.6bil at end-2009, it climbed by 8.4% to RM560.1bil as at end-August 2010, according to data by CIMB Research.

The household debt to gross domestic product (GDP) ratio increased from 66.7% in 2004 to 76% in 2009 but is estimated to ease to 74.6% at end-2010.

Nevertheless, compared to the entire banking sector's NPL ratio of around 3.1%, the household sector's NPL ratio stood at 2.3% at end-2010.

Anecdotal evidence indicate that bankers are focusing more on the underlying collateral, especially for mortgages and auto loans.

Collaterals act as an eventual source of repayment during default and not an immediate source of repayment. As a result of this focus, the actual debt servicing ability of the household sector, as reflected by its disposable income,

has often not been looked at in detail during credit assessments.The proposed guidelines is proposed to fill this gap and thereby improve the quality of credit assessments done by banks.

Would this dampen property demand? The Real Estate and Housing Developers' Association Malaysia (Rehda) president Datuk Michael Yam said it was a signal for banks to be  “less exuberant” in their lending.

However, he believed banks are self-regulating and can curb defaults on its own.

He was confident that the “feel-good momentum” in the property market from last year would continue into this year.

Would the tightening of conditions for loans and cutting the groundswell of good returns from credit cards affect the bottom lines of banks?

 Apparently so.