Assessing Household Borrowers' Debt-Servicing Ratios
Bank Negara Malaysia's 2022 Financial Stability Report sheds light on the debt-to-service ratios (DSR) of household borrowers in the country. The report indicates that approximately a quarter of household borrowers have DSRs exceeding 60 per cent as of December 2021. However, despite this statistic being one of four concerning indicators, the risk of impairment remains low due to the majority of these borrowers belonging to middle to high-income households. This blog explores the significance of DSRs, the current trends in loan growth, and the overall stability of Malaysia's household credit market.
DSR is a crucial metric used to assess a borrower's financial health. It is calculated by dividing the borrower's total monthly debt commitments by their total monthly income. According to Perbadanan Insurans Deposit Malaysia (PIDM), a safe DSR is typically considered to be between 20 and 40 per cent of the total income. However, lenders generally accept DSRs lower than 60 per cent as reasonable for borrowers.
Despite the presence of borrowers with risky DSRs, the report highlights that a significant proportion of these borrowers come from middle to high-income households. These households usually possess more substantial financial buffers, enabling them to meet high loan commitments even during financial difficulties. As a result, the risk of impairment for credit exposures held by such borrowers is assessed to be low.
In the second half of 2022, loans in Malaysia experienced steady growth, increasing by 5.9 per cent compared to 5.7 per cent in June. This growth came as the economy recovered from strict containment measures implemented to combat the COVID-19 pandemic. The entire year witnessed loan growth nearing pre-pandemic levels, averaging 6.2 per cent between 2015 and 2019.
Bank Negara Malaysia observed that credit growth closely aligned with household incomes, as evidenced by the relatively stable median debt-to-income (DTI) ratio at 1.5 times. This ratio increased slightly from 1.4 times in June 2022. Other indicators of debt-servicing capability, such as median debt service ratios of newly approved and outstanding household loans, remained prudent at 43 and 37 per cent, respectively. Notably, two-thirds of newly approved loans in 2022 had DSRs below 60 per cent, a proportion that has remained unchanged since 2018.
The 2022 Financial Stability Report by Bank Negara Malaysia provides valuable insights into Malaysia's household credit market. While a quarter of household borrowers have DSRs exceeding 60 per cent, the overall risk of impairment remains low due to the majority of these borrowers belonging to middle to high-income households with sufficient financial buffers. With continued loan growth in the wake of economic recovery and prudent debt-servicing capability indicators, Malaysia's household credit market remains stable and poised for future growth.