Households can withstand extreme equity market shock - BNM

As of June 2020, household debt moderated to 4.0 per cent compared with 5.5 per cent in 2019, said Bank Negara Malaysia (BNM).

"This was mainly reflected in the weaker loan growth for the purchase of residential properties and motor vehicles in the first half 2020 (7.2 per cent and -0.9 per cent, respectively; 2019: 8.5 per cent and -0.4 per cent, respectively)."

Household leverage increased the most among borrowers earning less than RM5,000 per month in the first half of 2020, amid income prospects that are more uncertain and liquidity buffers for borrowers earning less than RM3,000 are already stretched, BNM said in its Financial Stability Review -- First Half 2020, released today.

BNM said the higher leverage has been mainly attributable to an increase in borrowings for the purchase of homes earlier in the year and in June following the reintroduction of the Home Ownership Campaign (HOC).

Despite expectations for labour market conditions to improve going forward, borrowers with variable income and/or employed in more adversely impacted sectors will also likely face continued challenges.

For these borrowers, the targeted assistance extended up to the first quarter of 2021 will provide further temporary financial relief.

On the other hand, government measures such as the wage subsidy, and reskilling and upskilling programmes will serve to improve future employment and income prospects, which, in turn, will support debt serviceability.

Based on enhanced financial framework, BNM estimates that household borrowers who may experience difficulties, in servicing their debt as a result of income and unemployment shocks are unlikely to account for more than 15 per cent of total borrowers.

Among these borrowers, about one per cent of total borrowers with three per cent of outstanding household debt are expected to default after accounting for financial buffers held and targeted repayment assistance extended to borrowers in need.

It said about 40 per cent of the potential defaults arise from housing debt with an average loan to value of 70 per cent, thus limiting financial exposures of affected borrowers and losses to the banking system.

Household asset quality is expected to see some deterioration in the second half of 2022 and throughout 2021 after the automatic moratorium ends, but banks are well-positioned to absorb higher credit losses.

Asset quality is also expected to remain supported by the transition to more targeted assistance measures and gradual improvements in the income and employment outlook.