Fitch: Property developer lending can stoke risks in Malaysia

The scheme is likely to encourage unregulated lending to households with weak financial profiles, and undermine the strength of the financial system if not implemented prudently, it said in a statement today.

Lending by property developers will fall outside the purview of Bank Negara Malaysia (BNM). This means, it will not be subject to the same level of scrutiny, risk management and underwriting standards, as lending by banks.

The scheme also runs counter to measures introduced by the central bank over the last six years to rein in the rise in household debt, said Fitch.

In January 2014, BNM banned the developer interest bearing scheme (DIBS), which allowed homebuyers to put down a small amount upfront and pay the rest upon completion. The programme appeared to have stoked property speculation.

BNM has also introduced property gains taxes in 2010 for properties sold within five years, raised the maximum loan-to-value ratio, and reduced the maximum tenure for residential mortgages and personal loans.

Minister for Urban Wellbeing, Housing and Local Government Tan Sri Noh Omar had on Sept 8, announced that property developers can now apply to his ministry for a money lending licence for housing loans worth of up to 100 percent of a property's value.

He said the move would provide an additional financing source for borrowers who may not qualify for a bank loan.

The Cabinet was briefed on the programme on Sept 14 after some of Noh's colleagues expressed reservations over it.

Today, Noh said he had been asked to adjust the plan to avoid its misuse, but it was not being abandoned.

He added that several developers had already been given the licence.

Fitch believes macro-prudential tightening has been largely successful.

Household debt growth eased from a peak of 16.8 percent in 2011 to just 7.3 percent in 2015 - the slowest in eight years.

The composition of new household loans has also improved with lending by the unregulated non-bank sector has cooled more than lending by banks, while growth in unsecured consumer loans having slowed more than mortgage lending.

Nevertheless, household debt is still rising and high by regional standards, at around 89 percent of the Gross Domestic Product.

Leverage ratios are particularly high among lower-income households. For example, those earning less than RM3,000 per month have debt equivalent to around seven times their annual income, compared with three times, among higher-income households.

It is precisely those households with weaker financial profiles and poor access to bank loans that are likely to be targeted by developers.

Moreover, developers have been told they can charge interest rates of up to 12 percent on loans backed by collateral, and up to 18 percent on unsecured loans, compared with an average home loan rate of around 4.5 percent.

"Many households could struggle to service loans at such high interest rates. The systemic risk posed by the scheme will ultimately depend on the willingness of property developers to take part, and on the market's willingness to fund developers. Large developers are likely to be cautious," Fitch said.

They have no access to credit bureau data, which will make it difficult to assess the creditworthiness of borrowers.

Furthermore, their core business has proved profitable in the last few years, and any move into lending would leave fewer resources available for property development.