Fitch: Developer loans could heighten risks linked to rising household debt

SINGAPORE: Fitch Ratings said yesterday the Malaysian government’s decision to grant lending licences to property developers could add to the risks associated with rising household debt.
This, it said, is because the scheme is likely to encourage unregulated lending to households with weak financial profiles, and could undermine the strength of the financial system if not implemented prudently.
Malaysia’s household debt stands at 89% of gross domestic product and continues to rise, and is considered high by regional standards.
Fitch highlighted that leverage ratios are particularly high among lower-income households, with those earning less than RM3,000 a month have debt equivalent to around seven times their annual income, compared with three times among higher-income households.
“It is precisely those households with weaker financial profiles and poor access to bank loans that are likely to be targeted by developers,” it said in a statement.
High interest rates, Fitch said, compared with an average home loan rate of around 4.5%, could see many households struggling to service their loans.
It said the systemic risk posed by the scheme will ultimately depend on the willingness of property developers to take part, and on the market’s willingness to fund developers.
Large developers are likely to be cautious, with no access to credit bureau data, which will make it difficult to assess the creditworthiness of borrowers.
“Furthermore, their core business has proved profitable in the last few years, and any move into lending would leave fewer resources available for property development. However, weaker developers could be tempted to lend in order to ramp up property sales,” Fitch said.
Lending by property developers will fall outside the purview of Bank Negara Malaysia, which means that it will not be subject to the same level of scrutiny, risk management and underwriting standards as lending by the banks.
Fitch said the scheme also runs counter to measures introduced by the central bank over the last six years to rein in the rise in household debt.

In January 2014, Bank Negara banned the Developer Interest Bearing Scheme, which allowed home buyers to put down a small amount upfront and pay the rest upon completion. Since 2010, Bank Negara has introduced property gains taxes for properties sold within five years, raised the maximum loan-to-value ratio, and reduced the maximum tenure for residential mortgages and personal loans.