[Economics] Curbing Rising Household Debt

Capping tenure

To contain the rise of household debt which reached 82.9% of GDP, BNM has capped the tenure of personal loans and property loans. The central bank announced a slew of measures aimed at reinforcing responsible lending practices and combating surging household debt. These include shortening the personal financing tenure to a maximum period of 10 years and capping the maximum tenure for residential and non-residential property financing at 35 years. 

Prohibiting pre-approved financing

In a move to curb spiralling household debt, BNM also announced a set of measures including pulling the brakes on pre-approved loans by housing developers, a feature which has allowed many Malaysians to buy properties they could not really afford on their wages. It has also banned the offering of pre-approved personal financing products which is expected to help keep a lid on the debt binge at the household level. 

The central bank has also prohibited the offering of pre-approved personal financing products, such as unsolicited pre-approved credit cards. An unsolicited credit card limit increase offer which is the offer of a specified increase in the credit limit made to a current credit card customer. Accepting the offer is usually a very simple process and in most cases does not require the consumer to provide any financial information. 

Curbing DIBS and ICS

Due to the strong house-price appreciation in recent years leading to high mortgage loan, there have been numerous calls for the government to clamp down on speculation. In November 2013, BNM issued two guidelines to banks tightening lending practices. These include curbs to Developer Interest Bearing Schemes (DIBS) and enforcement of stricter Loan-to-Value ratio calculation. Interest Capitalization Scheme (ICS) is a type of scheme where interest costs are capitalized and built into the sale price instead of being paid by the borrower as they are incurred. The most popular type of ICS in Malaysia is the DIBS where during the construction period, the developer instead of buyer pays for any interest incurred on the mortgage loan until construction is completed. To offer DIBS, developers include the cost of interest payments into their launch prices. As a result, the future cost of owning the property are inclusive of retail price and interest costs, becomes the advertised retail price, which is higher than would have been without DIBS. Since property prices are set at the extremes, this creates upward pressure on the prices of surrounding properties and higher mortgage loan. Moving into 2014, BNM will disallow banks from offering financing to any projects that offer any form of Interest Capitalization Schemes to avoid speculation and property bubble. 

Responsible Finance Guideline

Also earlier in 2012, BNM has implemented The Responsible Finance Guideline to will help borrowers to engage debt management in a more pro-active manner and negate the Non-Performing Loans. Propsective loan borrower will be assessed based on net income basis instead of gross income, after deducting statutory deductions for tax and EPF and all other debt obligations such as car loan, other housing loan and credit cards). The Net Income is effectively the take-home pay that represents the income available to the borrower to settle his debt obligations as well as the cost of living.  Also, the credit assessment will disregard one-off sources of income such as annual discretionary bonus to arrive at a more prudent credit assessment. 

Increasing RPGT

In Malaysia, real property gains tax (RPGT) is imposed with the intention to curb property speculations. Accordance with the Budget 2014 announcement, the rates for RPGT has been increased to 30% from 15% in 2013. Government’s reason for the hike is mainly to reduce speculative activities on housing prices and real estate market. Government believes that hiking up RPGT enable the citizen to purchase affordable new houses. However in long term, hike in RPGT rates will slow down the sales of the secondary markets (sub-sales) and also might reduce property investments by local and foreign property investors. 

Prudent debt service ratio

In addition to the above measures, the key credit providers especially banks are required to observe prudent debt service ratios in their credit assessment to ensure households have sufficient financial buffers to protect them against rising costs and unexpected adverse events. Households who have the financial capacity to take on borrowings will continue to enjoy access to financing. To enhance responsible debt management by households, BNM will intensify its efforts in financial education to all segments of society including young and first time borrowers from financial institutions.

To conclude, the concern over household debt has caught the attention of the authorities in taking relevant action. The level of debt continues to rise following low cost of fund and rising consumption of household. At high level of debt, Malaysia is at vulnerable to unemployment, income reduction, interest rate increase and slowing economy growth. Monetary measures and regulation will be playing important role in curbing this rising household debt. 

(Sources: Department of Statistics Malaysia, The Star, The Edge, Bernama and various research reports)