PETALING JAYA: While banks, generally, are not reckless and irresponsible lenders going by the non-performing loans (NPLs) yardstick, they should be watchful when extending loans which may be risky amid the spike in household debt, said RAM Holdings Bhd group chief economist Dr Yeah Kim Leng.
The latest figures released by Bank Negara showed that total household debt reached an all-time high of RM561.5bil or 78.1% of gross domestic product (GDP) as at end-August, the second highest debt level in Asia outside Japan.
As at end-2009, household debt stood at RM516.6bil or 76.6% of GDP, compared with 63.9% in 2008 while from 2005 to 2008, total household debt averaged at 67%.
“As competition intensifies in a low interest rate and liquidity-flushed environment, banks should continue to maintain prudent risk appetite and guard against being blind-sided by build-ups in risk concentrations,” Yeah said.
“Since hitting a peak of 166% of GDP prior to the Asian financial crisis in 1998, the country's total private sector credit has reversed its declining trend from a low of 111% in 2008 to reach an estimated 123% of GDP this year. With the rise in overall debt level, it is appropriate to alert banks against risky lending that usually accompanies a surge in debt level.”
Given the close supervision of the central bank and the continuous strengthening of banks' risk management since the Asian financial crisis, he said there was less room for reckless lending although banks may stretch lending to the limits for selected individuals and firms.
Banks would have to weigh carefully the trade-off between competing for a bigger slice of the loans market and higher risk exposure, he added.
Yeah said banks accounted for 87% of total private sector credit while the bond market contributed the rest, adding that over the last 10 years, loans growth averaged 6.9% per year compared with 5.1% for debt securities.
With the emphasis on private sector-led growth over the next 10 years under the Economic Transformation Programme (ETP), he said not only the rate of re-leveraging needed to be watched carefully but also the appropriate mix between bonds, loans and internally generated funds to ensure the optimal capital structure for firms and allocation of credit risk in the economy.
Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz last month in a keynote address at the Financial Industry Conference 2010 said the recent global financial crisis had shown that irresponsible lending practices by banks had contributed to the build up of excessive leverage among households, which in turn sowed seeds for negative consequences on the financial system and real economy.
Meanwhile an analyst from a foreign bank-backed brokerage said judging by the low NPLs it showed that Malaysian banks were responsible lenders.
For example, she said NPLs in the mortgage segment as at September stood at 5% or RM7.8bil versus 5.6% (RM10.7bil) in December 2008, from its peak of 9.4% (RM14bil) in December 2005. The analyst added that over-tightening of banking regulations would hamper the growth of the banking industry.
Malaysian Rating Corp Bhd (MARC) vice-president and head of financial institution ratings Anandakumar Jegarasasingam felt there was still scope for Malaysian banks to improve their lending discipline and more concrete actions on the part of regulators was needed to curb rising debt level.
“Given the competitive landscape and growth limitations, Malaysian banks have yielded to the temptation of focusing on the household sector ever since the Asian financial crisis. While some Malaysian banks may be particularly lax in their credit origination policies, the same is not true for the entire banking sector.
“As much as the banks are responsible, the regulators are also equally responsible for the escalating household sector debt. While it is encouraging to note that the regulators in recent times have taken some steps to control the escalation in household sector debt, more concrete action is needed if Malaysia is to avert a possible household sector debt crisis,'' he noted.
Association of Banks in Malaysia (ABM) in responding to a query said commercial banks were not irresponsible lenders nor were they culprits to the “rising debt level”.
ABM added that member banks were guided in their lending activities by clear requirements of risk appraisals and exercise of consistent prudential standards.
“Balancing responsible lending against allegations of being risk adverse had always been our member banks' greatest challenge.