Adverse income, employment shock scenario can result in up to 4 pct loan default by end 2024 - BNM

KUALA LUMPUR: Bank Negara Malaysia (BNM) has expressed its concerns over the financial resilience of some segments of household borrowers that highly leveraged and have lower financial buffer, a situation which can only be addressed by labour market and social protection reforms.

It said household financial assets grew at a more moderate pace (2.4 per cent; June 2021: 5.3 per cent) due to weaker equity market performance and sizeable drawdowns of retirement savings under various special withdrawal facilities put in place due to the pandemic.

"Concerns remain over the financial resilience of some segments of household borrowers that are highly leveraged and have low financial buffers," the central bank said in its Financial Stability Review (FSR) for Second Half released here today.

According to BNM, a stress test conducted by the central bank showed that under adverse scenarios of income and employment shocks, between 3.8 per cent and four per cent of banking system loans could be at risk of default by end-2024 due to borrowers having insufficient financial buffers.

It said the bulk (63.5 per cent) of these at-risk borrowers earn monthly incomes of less than RM5,000.

The central bank said public support measures and repayment assistance offered by banks continued to help financially-distressed households cope with income and employment setbacks.

In 2021, it said 23,711 new borrowers have enrolled into Credit Counselling and Debt Management Agency's (AKPK) Debt Management Programme to rehabilitate their finances.

Meanwhile, it said under AKPK's Financial Management and Resilience Programme (URUS), borrowers can benefit from free financial advisory and education programmes aimed at promoting longer-term financial resilience.

As of March 4, 2022, it said 5,657 individuals with total loan exposures of RM2.7 billion have enrolled into URUS, of which, around half of the borrowers with total exposures of RM1.4 billion are those who have experienced job losses.

Beyond URUS, it said banks continued to offer a range of repayment packages to borrowers which are tailored to their financial circumstances and financial institutions have also extended assistance packages to borrowers affected by the flood events in December.

Further drawdown of retirement savings would increase financial vulnerabilities

Going forward, it said the improving economic outlook and employment prospects are expected to support overall household debt-servicing capacity.

BNM said the latest insights by the Employees Provident Fund (EPF), however, underscore material longer-term risks to household resilience.

The central bank said according to EPF, around 6.1 million EPF members currently have retirement savings of less than RM10,000 in their accounts, of which, 3.6 million have less than RM1,000.

"Further drawdown of retirement savings would increase the financial vulnerabilities of these households over the longer term given already insufficient savings for retirement."

It said risks would be higher for household borrowers with loan tenures extending into retirement and those who are already retired.

"As the economy recovers, it will therefore be important to ensure that impacted households are able togradually rebuild their financial buffers.

"Efforts by the government to pursue the necessary labour market and social protection reforms will be key towards raising income levels and household resilience in the long run," it added.

-- BERNAMA