The responsible lending guidelines, among the pre-emptive measures by Bank Negara
to contain surging household debt, have made a strong impact on most
people. Will the guidelines be effective to control the alarming levels
of household debt and put the brakes on loan growth?
THE
responsible lending guidelines, which came into effect on Jan 1, created
quite a stir in the
banking industry with leading indicators signalling
further signs of loan growth slowing in the coming months.
There
is some discontent among consumers in terms of having their loans
approved based on net income compared with gross income previously, in
addition to which is the need for more documentation.
Some
automotive players and property developers are not too happy either as
they feel the move will be a dampener to their business moving forward.
Loan growth for January was lower at 12.1% year-on-year (y-o-y),
probably the slowest since 2010, compared with 13.6% y-o-y in December
last year mainly due to slower growth in the household and business
segments.
Total application and approval for loans in January was
down almost 3% from a year ago although those disbursed rose by 5.6%
y-o-y.
Loans in the household sector, which has a high level of
indebtedness, was dragged down by slower growth in auto, mortgage and
personal loans. But some quarters argue that this could be attributed to
shorter working days in January due to the
Lunar New Year break and
other holidays.
Officials say that a loan growth in the region of
12% appears to be fine and much stronger growth may be a problem if
left unchecked.
Indications are that loan growth to households,
which was lower in 2011 than 2010, will normalise in February this year
after the dip in January.
Whatever the arguments are, this trend,
if it does continue, can be seen by some quarters as worrisome. Will
loan growth then continue to slide? Some industry observers and analysts
think so.
Loan growth mixed signals
Under the
guidelines, banks are, among others, required to apply the net-income
calculation method instead of gross income when computing the
debt-service ratio for potential borrowers. The lending guidelines cover
housing, personal and car loans,
credit cards, receivables and loans
for the purchase of securities.
Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias says based on indicators, the rating
agency feel that loan growth will likely moderate this year to a
single-digit figure compared with a 13.6% growth recorded last year.
Nor Zahidi says the stricter guidelines is a step in the right direction.
This
is due to the fact that some potential borrowers will no longer be
eligible for certain
types of loans, he says. This, he adds, is
evidenced by a steep drop in the volume of passenger cars sold in
January by 25% compared with the same period last year following
stricter hire-purchase loan processes.
Total vehicle sales,
however, rebounded by 9% in February with industry sales hitting 44,013
units from 40,387 units in February 2011.
Going forward, Zahidi
says he foresees further decline in the banking sector loan growth as
banks continue to be extra prudent in their lending practices, adding
that there are also declines in loan applications for cars, credit card
and residential properties based on latest indicators.
Loan
applications for purchases of passenger cars contracted by 15.5% in
January from 7.8% growth in December 2011. Another significant drop was
the application for the amount given to the credit card segment which
fell by 50.9% in January from a decline of 10.2% in December 2011.
Applications for loans for the purpose of purchasing residential
properties contracted 6.3% from a growth of 11.3% in December 2011.
Approvals
for loans categorised for “personal uses” declined by 29.8% compared
with a 42.4% growth in December 2011 while the amount of loans approved
for the purchase of passenger cars and residential properties contracted
by 18.4% and 20.9% respectively in January (December 2011: 0.3% and
1.8% respectively).
The Association of Banks in Malaysia (
ABM)
says the implementation of the guidelines will not have a direct
relation to its member banks' loan growth. Factors like global economic
conditions and its impact on the regional economy as well as
developments on the external and domestic front will be the more
pertinent factors that will have an effect on loan growth, it says.
“The
guidelines merely set out to better define the expectations of banks to
act responsibly and transparently when lending. The policies and
practices envisaged are not entirely new as they underscore the existing
approach taken by our members. While it will ensure that the debt
commitments of individuals and households are within their repayment
capabilities, customers who can afford to repay will not be denied
access to
financing,” it says.
A robust retail finance market,
ABM says, cannot be measured by loan growth alone as the obligations
(financial and contractual) to repay, sound personal financial
management skills and responsible financing practices are more important
to the stability and sustainability of the market in the long run.
Weaker numbers
The
occurance of non-performing loans and loans in arrears appear to be
falling, and they are what bankers and regulators are paying close
attention to. That will indicate that the responsible lending
guidelines, even though they may crimp the longer-term trend, is not
having an impact on the quality of existing loans.
Wong expects loan growth to taper to 8%-9% after clocking in a strong 14% last year.
CIMB
Research says in one of its notes that it expects a slowdown in loan
growth this year due to weaker numbers from all major loan segments
including residential mortgages and auto loans.
RHB Research
Institute considers that on the whole, the new guidelines will have some
impact on household loan growth, but the extent of the impact remains
to be seen.
As for demand for loans from the household segment,
the research outfit does not think the growth will fall off the cliff,
but rather will be at a more moderate pace relative to recent years.
Jupiter
Securities head of research Pong Teng Siew feels that with the strict
adherence to the lending guidelines, loan growth may hit 8% or less
sometime later in the year but may pick up in some months.
OSK
Research is maintaining its loan growth projection for this year at 9%
despite the guidelines which it says will play a part in slowing loan
growth. The projection was underpinned by
Economic Transformation Programme (ETP) projects.
RAM
Ratings head of financial institution ratings Wong Yin Ching expects
loan growth to taper to 8%-9% after clocking in a strong 14% last year.
This,
she says, will be supported by expectations of a real gross domestic
product growth of 4.6% in 2012 (2011: 5.1%) and a more moderate
household loan growth due to various prudential measures introduced
since late-2010. Loans growth is said to be correleated to economic
growth and with the Government seeing growth to come in at 4%-5% this
year, expectations are that the pace of loans given out will accelerate
at a slower pace.
Wong says the loan growth will be partly
balanced by stronger financing demand from the corporate and commercial
sector in anticipation of the rollout of projects under the ETP and 10th
Malaysia Plan gaining momentum.
Meanwhile,
Maybank
IB Research, with a neutral call on the banking sector, says it expects
domestic loan growth of 10.5% this year, up from its previous forecast
of 9.4%, adding that mortgage lending is expected to hold up better than
anticipated.
According to Bank Negara's Financial Stability and
Payment Systems Report 2011, the growth of household debt to gross
domestic product (GDP) increased last year but the pace was slower with
outstanding household debts expanding by 12.5% to 76.6% for the year
compared to 2010 when debt grew 13.7% to 75.8%.
It adds that
signs of stabilisation in household debt relative to GDP was seen from
the second half of last year after a continued upward quarterly trend
observed since 2009 with borrowing continuing to be concentrated on
residential properties and motor vehicles, which together account for
64% of total household debt.
The report states that bank lending
to individuals earning more than RM3,000 per month accounted for about
80% of total loans to households by the banking system.
Choo says the guidelines will not have any adverse impact on those with genuine capacity to repay.
It
adds that bank exposure to borrowers with monthly incomes of RM3,00 or
less was relatively low representing less than 13% of total banking
system loans. “Based on historical experience on the level of impairment
and provisioning, any impairment losses to banks are not likely to
exceed RM2bil or less than 8% of pre-tax profits of commercial and
Islamic banks,” it notes.
The growth in household debts had also
been accompanied by a corresponding expansion in household financial
assets, it says, adding that stronger growth in household deposits which
expanded by 12.2% balanced the slower increase in financial assets.
Timely move?
Despite
the brouhaha surrounding the pre-emptive measure, many feel the
introduction of the guidelines is timely and justifiable.
RAM's Wong views it as one of the many measures to contain the growth of household debt.
The
banking system's household financing has been rising steadily over the
last five years and currently constitutes about 55% of the system's
total financing, she says, noting that the growth has stemmed mainly
from home and personal loans.
As a result, she says, Malaysia's
household debt-to-GDP ratio has trended upwards from 69% in 2006 to 77%
in 2011. Compared to other countries in the region, this figure is
considered high especially when looked at in relation to GDP per capita,
she adds.
Some of the other pre-emptive measures which Bank
Negara had earlier imposed to control rising household debt include
tighter criteria for residential property financing, such as a 70%
loan-to-value (LTV) cap on a borrower's third housing loan and beyond,
as well as raising the income eligibility criteria for credit cards.
Some
analysts concur that the lending guidelines are vital to ensure quality
loan growth and some form of control is necessary. With ringgit
deposits slowing, analysts expect banks to start pulling back on lending
even in the absence of the guidelines.
Zahidi says the
guidelines are introduced to ensure that the consumer segment will not
be overstretched for too long. While it will take a few years before
Malaysia's household debt can be reduced to below 60% of GDP, the
stricter guidelines is a step in the right direction, he says.
However, he adds that this will have some adverse effects on the banking sector's loan growth as well as on private consumption.
OCBC Bank (M) Bhd
country chief risk officer Choo Yee Kwan says credit assessments under
the guidelines are done holistically by taking into account the total
debt obligations of an individual borrower and will not have any adverse
impact on those with genuine capacity to repay.
At the same
time, he says, it will help to deter borrowings for speculative purposes
and align debt burden more closely with repayment capacity.
Cavale says the long-term impact on banks is yet to be determined.
“While
the guidelines are relatively prescriptive on the lending approach,
they are really complementary when viewed from the vantage of a bank
with more advanced risk assessment tools and portfolio screening and
early warning triggers for sustainable loan portfolio health,” Choo
explains.
A banking analyst from MIDF Research, on the other
hand, thinks that while the guidelines on the whole are good, some
details are vague and not properly spelt out. For example, there is no
mention of specific details on liability as well as on debt servicing
ratio, and is left to individual banks to assess the risk appetite of
loan applicants.
managing director for cards and consumer lending Anand Cavale feels
that while the guidelines will strengthen the control for lending, the
long-term impact on banks is yet to be determined.
Although it
will help reduce the level of household debt, this will depend on the
state of the economy, as household debt is directly linked to the
performance of the country's economy, he says.
While the
guidelines will strengthen the overall ability to lend prudently, Cavale
believes there should be proper infrastructure in place. For example,
banks having accessible ways to the customer income information will
help the process to implement the guidelines more smoothly, he points
out.
Some analysts feel the
stringent lending guidelines may cause banks to shift their focus to
other areas to boost their bottomlines.
The MIDF Research analyst
says banks may, for example, look to increase high net worth
individuals or affluent customers for their credit cards as in the case
of
. This, he adds, will include cross selling of cards to this segment.
For
the mortgage side, banks may look into issuing more financing for
landed properties in selected locations and for the auto business, they
may source for stronger dealership, the analyst says.
Choo says
OCBC Bank's objective is to derive 30% of its income from non-interest
income sources, noting that it is keen to diversify and strengthen its
deposit base to ensure it is not overly concentrated in any one specific
segment.
According to Cavale, it is likely that banks will add
other products or services that will support additional streams of
income to mitigate potential reductions in the lending area.
Another
area which banks are aggressively pursuing currently is the small and
medium enterprise (SME) segment. This segment, according to an analyst
with an investment bank, will provide better margins and probably make
up for the shortfall in slower loan growth from the stringent
guidelines.
Those banks which were not focusing on the SME
segment will now have to employ strategies to capture this growing
segment, he adds.