Tighter lending rules 2012

Personal loans expected to grow at slower pace this year as banks turn more cautious

PETALING JAYA: Personal loans, which form part of household loans, are expected to grow 15% this year a relatively slower pace than last year on stricter household lending rules coupled with external headwinds that impact economic growth.

Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias expected a moderation in economic activity and stricter lending rules by banks.

“The growth in personal loans will still be relatively strong this year albeit slower than in 2011 as banks tighten their lending rules in response to slower economic growth.

“Although bad debt as a percentage of total debt has not increased in recent times, banks will likely be more cautious for several reasons.

“This takes into account a more moderate gross domestic product (GDP) growth this year .

“We foresee a GDP growth of 4.4% in 2012, which is lower than the Government's projection of 5% to 6%,” Nor Zahidi told StarBiz.

“As such, some segments of the labour market may be affected.

“The high household debt as a percentage of GDP (in Malaysia's case, it is more than 75% of GDP) means that the household sector's balance sheet is somewhat overstretched.

“This is the reason why Bank Negara undertook measures, among others, to impose a lower loan-to-value ratio for the purchase of third and subsequent properties and lower credit limits for users whose incomes are below RM3,000 per month,” Nor Zahidi said.

According to Bank Negara statistics, loans provided by commercial and Islamic banks for “personal use” increased by 20.2% to RM50.8bil as at end-December 2011 from RM42.3bil a year ago.

At the end of December 2010, the growth in loans provided for personal use by these institutions moderated to 13.5% following the recession in 2009.

As a whole, the amount of loans given out by these institutions have surged from RM23.2bil at the end of 2006 to RM50.8bil at end of 2011, an increase of 119% in five years.

The household sector remained the strongest growth contributor, making up 55% of the banking system's loans. At end-November 2011, personal loans accounted for some 5% of the system's loans.

RAM Ratings head of financial institution ratings Wong Yin Ching said the central bank had been proactive in implementing certain targeted measures with respect to household lending to encourage greater financial prudence among individuals since 2010.

She said banks were required to assess potential borrowers' repayment capabilities based on their net instead of gross income; with stricter regulations and more cautious consumer sentiment, the rating agency expected loans growth for the household sector to moderate this year.

Wong added: “The likelihood of a recession in Europe this year would also dampen external demand, negatively affecting our exports and industrial production.

“Projects under the Economic Transformation Programme and 10th Malaysia Plan might spur financing growth although this will depend on the pace of the roll-outs. Overall, we estimate total loans growth for the domestic banking system at 8% to 9% in 2012.”

Many analysts expect the responsible lending guidelines, which came into effect since Jan 1, would help to slow down the growth in personal loans.

Among others, the guidelines would require banks to use net income to calculate the debt service ratio for loan approvals.

“Up to December, the guidelines did not slow down personal loans growth which was still picking up. But over the next few months, it would likely show some impact,” an analyst noted.

The guidelines cover housing, personal and car loans, credit cards, receivables and loans for the purchase of securities.

OCBC Bank (M) Bhd projects a double-digit growth in personal loans this year, similar to that of last year; OCBC's personal loans portfolio was still small but growing, its country chief risk officer Choo Yee Kwan said.

Choo said OCBC had always exercised a prudent approach in assessing the affordability and repayment capacity of borrowers as well as the suitability of products for borrowers in its credit assessments.

“Loans growth will be negatively impacted, to some extent, in the event that external or domestic economic conditions take a turn for the worse. This also depends on the severity of such a downturn in the economic cycle,” he said