Financial institutions should focus more on commercial loans, especially to small and medium enterprises (SMEs), against increasing concerns over the level of household debt.
No doubt, the household sector which comprises mortgage, hire purchase, personal and credit card financing is generally less risky, the SME sector is a new growth area that can be further tapped.
“On a macro perspective, lending to SMEs should be further galvanised as more than 90% business establishments are SMEs,” said Malaysian Rating Corp Bhd (MARC) chief economist Nor Zahidi Alias.
“Loans for cars, mortgages, personal uses and credit cards constituted about 14.2%, 26.8%, 4.8% and 3.4% of total loans respectively in November 2010,” he noted.
Nor Zahidi said banks should have a more balanced loan portfolio in order to generate sustainable returns.
“However, because of different risk perceptions, banks tend to focus their lending towards low risk (but with stable returns) portfolios.
“This can be a new growth area but because of the perception of higher credit risk profile associated with the industry, lending to SMEs has not been forthcoming,” he said.
Nor Zahidi said consumer loans were more appealing from the banks' perspective due to their low risk and respectable returns.
“This is apparent for secured lending such as hire purchase and housing loans as there are underlying assets that banks can fall back on,” he said.
On why the country has a high household debt level, RAM Holdings Bhd group chief economist Dr Yeah Kim Leng said there were several reasons related to demographics, income growth, high savings and asset price inflation.
“With a relatively young and growing population, there is an increasing number of people entering the workforce who are able to afford home mortgages, car loans and credit card purchases,” he said.
Nor Zahidi added that the emersgence of the corporate bond market after the 1997 Asia financial crisis had resulted in large corporations tapping the capital market (instead of bank loans) for long-term financing.
“Consequently, the gap was filled by consumer loans,” he said.
Yeah pointed out that the rise in household indebtedness was also a concern at Bank Negara which, in its recent statement, urged lending institutions, individual borrowers as well as policy makers to exercise caution on the matter.
“We need to be wary of incipient credit bubbles, given the widespread misery they had wrought on economies when they burst.
“This is experienced by those living in the United States and Europe currently,” he said.
Total household loans had climbed 8.4% to RM560.1bil from Jan 1 to Aug 31, 2010 from RM516.6bil in the previous corresponding period.
The country's household debt-to-gross domestic product (GDP) ratio shot up to 76% between 2004 and 2009, and is the highest in Asia ex-Japan.
Currently, Yeah said, bank loans accounted for about 84% of the household debt in Malaysia.
“Over the past five years, the proportion of loans extended by banks to the household sector has remained relatively stable at about 55% of the total.
“The spike in household debt-to-GDP ratio can be partly explained by the recession, whereby the denominator GDP contracted whilst bank lending to households grew at 9.8%,” he said.
“However, we see that bank lending to households up to November 2010 has accelerated to 14%, marginally higher than the 13.2% rise in total bank loans.
“Whilst this suggests that we cannot take issue with the bankers on the current direction of bank lending, they can do more to increase loans to entrepreneurs and businesses especially for SMEs.”
From a bank's perspective, OCBC Bank (Malaysia) Bhd country chief risk officer Choo Yee Kwan said the elevated level of household debt did not pose undue concern.
He said banks maintained prudent underwriting standards with emphasis on assessment of debt servicing ability and financial commitments of each applicant.
“We note that the recent imposition of a 70% cap on the financing of third properties had contributed to a slowdown in the momentum of applications and approvals of residential mortgages in November 2010,” he said.
Conceptually, Choo said, consumer loans spread over a large number of borrowers would reduce concentration risk, as opposed to corporate lending which tended to involve more chunky exposures to a relatively less diversified number of corporate groups.
“However, as seen in the sub-prime crisis in the United States, rampant build-up of exposures to less credit-worthy borrowers in the residential mortgage market could eventually prove problematical,” he said.