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Caution on retail lending; warning comes as household debt surges    
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Source: The Star Online

PETALING JAYA: Although banks in Malaysia are generally responsible lenders, they should not focus too strongly on retail lending and be prudent in their lending activities to avoid surging household debt.

Increasing at an annual rate of 9.3%, household debts currently accounted for 73% of gross domestic product.

The debt accumulation by the household sector expanded rapidly during the three-year period leading up to 2009, according to statistics.



"Supportive credit environment has manifested into increasing household debt" RAM RATINGS HEAD OF FINANCIAL INSTITUTION RATINGS PROMOD DASS



RAM Ratings head of financial institution ratings Promod Dass told StarBiz that banks were generally too focused on retail lending and the agency was watching closely the rapid retail loan growth in some banks.

This supportive credit environment has manifested into the trend of increasing household debt. Given that more than half of the banking sector's lending is composed of retail loans, any simultaneous hiccup in the economy combined with a spike in interest rates could derail the industry's asset quality.

In such a scenario, an individual's income could be impaired while concurrently shouldering heavier debt servicing.

While economic conditions are stable, it would be a good time now for banks to review risk appetites and lending portfolio mix.

The crucial question to ask is how long more will the retail loan party' go on for? he said in an email reply.

In the context of Malaysian banks, Dass reckoned that it was not so much the question of whether underwriting tandards were more or less prudent than international norms, rather whether banks here could look beyond the cloud of the herd mentality that was currently too focused on retail lending.

The still very competitive retail lending space and entry of new banking players was likely to compound the problem, he noted.

On the underwriting standards for lending, Malaysian Rating Corp Bhd vice-president and head of financial institution ratings Anandakumar Jegarasasingam said banks should not only focus on developing their credit appraisal policies and risk management techniques, but also their own credit culture.



"Banking officials say the central bank is concerned about the effects of market competition from the lowering of lending standards, especially in the area of residential mortgage financing

Most Malaysian banks, he said, had fairly decent credit appraisal policies and techniques in the regional context but its implementation generally differs across the banks, partly as a result of commercial considerations and partly due to the lack of a strong and ingrained credit culture.

Performance driven incentive schemes, in the absence of a strongly ingrained credit culture, would invariably tempt bankers to go for the sale' rather than assessing the suitability of a potential client as well as the eventual risk for the bank, he added.

Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz early this month advised banks and insurers to observe prudent underwriting standards and responsible behaviour in their lending activities to avoid household debt.

OCBC Bank (M) Bhd country chief risk officer Choo Yee Kwan said although most banks had risk management tools, the credit exceptions to underwriting standards when approving for lending should be carefully monitored.

In this regard, they should set up internal tolerance limits when approving lending, he said.

It would defeat the objective of setting up the credit underwriting standards in the first place if banks allowed a high volume of credit exceptions to such standards, Choo said.

He felt the central bank was concerned about the effects of market competition from the lowering of lending standards, especially in area of residential mortgage financing.

Banks could therefore, he said, chose to compete on pricing or underwriting standards. If they compete on both, then the expected deterioration in the portfolio asset quality, coupled with inadequate returns, would be potentially disastrous in the longer term, he added.

Meanwhile, HSBC Bank Malaysia Bhd chief risk officer Paul Norton said the bank had always exercised prudent underwriting standards, in both corporate and retail operations in Malaysia, adding that this had allowed the bank to maintain a reasonable level of non performing loans.

Generally, there is always room for improvement and enhancement of risk management within the financial industry.

With the evolving financial environment, risk management should be somewhat flexible to adapt itself to the changes without compromising the standards,'' he said.

On the insurance front, Allianz General Insurance Company (M) Bhd head of underwriting Selina Lye said it was important for an insurer to instill prudence in their underwriting acceptance to ensure premium pricing equates to the risk exposure.

This approach, she said, would safeguard a company's financial stability which in turn would benefit the customers as it would be able to meet their financial obligations.

Apart from the usage of past year underwriting and claims statistics data to improve the current underwriting standards, Lye said it was also imperative in the long term to invest in analytical risk management tools, provide technical training and hire the right people with the right skill sets.

CIMB Aviva Assurance Bhd chief operating officer Leong Weng Ling felt the first step to improve the current underwriting standards would be in the form of an industry-wide study amongst all insurance companies to identify a standard set of underwriting guidelines.

Generally, each insurer currently adopts their own internal standards and guidelines by referring to their reinsurer's underwriting standards, according to Leong.

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