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Individuals to undergo stress test when applying for new loans [24-03-2011]  
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Individual borrowers will be subject to a stress test to gauge if they can afford a new loan once guidelines are introduced in the third quarter of this year.

The new guidelines are designed to inculcate responsible lending practices by financial institutions when dealing with retail customers where borrowers will be subject to a suitability and affordability assessment and verification of income.

Disclosure of terms and obligations of the loan would be improved and borrowers would be informed of the structure of the loan, charges such as stamp duty, implications of non or late repayment, risks associated with the product and any assistance of redress mechanism available to them.

Borrowers would also be stress-tested in the event interest rates were to rise by 100 to 200 basis points from the time the loan is applied.

Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz said the requirements were not intended or expected to hamper the availability of credit.

“The verification of affordability is very important in any loan,” she told the media when presenting the Bank Negara 2010 Annual Report and Financial Stability and Payments Systems report 2010 yesterday.

“We don't want to see people who cannot afford it to enter into debt.”

This latest measure was a pre-emptive strategy by the central bank to preserve the credit resilience of the household sector.

Last year, Bank Negara introduced a maximum loan to value ratio to stabilise the property market and to promote the affordability of homes for the general public.

It recently made more stringent minimum income and credit limit thresholds for people wanting to apply for a new credit card.

The central bank has also been monitoring the lending practices by banks to individuals to ensure no excessive amount of credit and risk is being borne by borrowers.

Household debt to GDP ratio was 75.9% as at the end of last year but the central bank believes households have sufficient financial buffers as their assets were 2.4 times that of debt.

About 65% of household assets are liquid and secured financing constitutes 65% of household debt, with housing loans accounting for 45% of household debt.

Gross non-performing loans among households is 2.3%.

It is learnt the new lending guidelines proposed by the central bank might be extended to lending institutions not regulated by the central bank such as cooperatives which have increasingly focused their lending towards individuals, in particular civil servants.

On the economy, Bank Negara is expecting GDP for 2011 to grow by between 5% and 6% this year and Zeti said that while there had been volatility externally from the earthquake damage in Japan and political tensions in the Middle East and North Africa, Malaysia's growing domestic demand would act as a buffer against any slowdown in external trade.

“The Malaysian economy is on a steady growth path in the medium term,” she said.

Zeti said that if private investments were carried out as planned and there were no further destabilising events externally, then growth for the year would be closer to 6% than 5%.

Bank Negara in moulding its growth projection of 5% to 6% assumed the price of West Texas Intermediate crude oil would range between US$90 and US$100 a barrel.

Should the price of oil settle at levels way higher then anticipated, growth will be affected as the high price of crude oil would hurt growth in Malaysia's trading partners more than Malaysia which is a net exporter of oil.

High oil prices may also push inflation higher than the 2.5% to 3.5% range estimated for this year but Zeti said the Government had the breathing space to rationalise the unwinding of subsidies in a more gradual manner than initially planned to mitigate cost pressures.

She said monetary policy would remain supportive of growth this year but the degree of accommodation would be reviewed, and rising prices monitored closely, to ensure economic growth is sustainable.

Meanwhile, Bank Negara announced it made a net profit of RM6.2bil and paid the Government RM2bil as dividend.

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