CREDIT RISK

Credit risk is the chance of loss resulting from a borrower's failure to repay a loan or meet

contractual obligations. The main part of revenue for banks is the interest charged to their

clients. thus, banks should avert any chance of default.

Household Debt Increased due to the Secured Loans

the First half of 2018, the borrowing amount of household debt increased slightly to 5.2%

compared to the previous year, which was 4.9%. loans demanded by the household for the

purchase of residential houses persisted to play a critical role in loans evolution in 2018. This

was supported by a huge demand for houses priced between RM250,000 and RM500,000.

Overall, Total household debt growth was also weighed by loans of purchasing securities

which grew by 8.4% to the overall increment in household borrowings.

Default risks to financial stability that come from household sector exposures have managed

properly through sound underwriting standards, risk management practices and loan

affordability assessment. debt service ratios (DSR) of the new loans approved were less than

60%. The debt servicing capacity of households continued to be unharmed, underpinned by

a high level of income to the borrowers and stable employment growth. The ratio of impaired

loans to total outstanding household debt for both banks and non-banks were sustained at

1.6% while delinquencies (failure to make a payment on a debt by the specified due date.)

decreased to 1.2% of total loans compared 1.4% in 2017. In particular, impaired personal

loans, loans for the purchase of residential and non-residential properties in the banking

system recorded an annual growth of 7.5%, 4.4% and 20.4%, respectively. Although the

amount of debt borrowed by those their income is less than RM3,000 has increased
substantially, total household loan reduced at about 3%. Thus, it is important to ensure debt

accumulation by this segment is undertaken carefully to avert undue debt burdens and

financial instability.

Even under stressed scenarios, banks are able to withstand potential losses from the

household sector. the banking sector has a strong enough capital to resist shocks from

household lending because potential losses to the banking system might face would be under

securely within the excess capital buffers (above the regulatory minimum of 8%). The

imbalances of Property Market have no imminent risks to financial stability as at end-June

2018, total exposures of Malaysian financial institutions to the domestic property market

decreased by 4% compared to the previous year 7.2%. Banks keep on to be the largest fund

provider to the domestic property market, and they provide a loan that is approximately 97%

(RM852.2 billion) of total financial institutions' exposures to the property market.

Exposures to Residential Property Market

Bank Nagara Malaysia reported that there is a huge gap between the demand and supply of

houses, specifically houses priced below RM250,000, and this triggered to put more pressure

on house prices. Therefore, Households started to seek loans to buy houses, and this caused

to increase the outstanding bank financing for the purchase of residential properties. Loan

applications approved for the residential property were above 70%, this indicates that eligible

borrowers have enough access to house financing. Thus, the overall quality of banks'

residential property loan portfolio remained intact because of banks took prudent actions

that in line with responsible lending and strengthened valuation and underwriting practices.

Therefore, aggregate delinquent and impaired residential property loan ratios in the banking

system remained very minimal, both at 1.1% (2017: 1.3% and 1%, respectively).
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Exposures to Non-residential Property Market

Overall, the activities of market conditions in the non-residential properties seemed passive

because the number of commercial properties (office space, shops, and shopping complexes)

transacted during the first quarter of 2018 fell by about 9% (4Q 2017: 8%). However, the

values transacted in this segment made an increase of 15.6% compared to the previous year

of 32%). Banks financing for the purchase of non-residential properties increased to RM216.5

billion at about 3% as at end-June 2018 as it was RM213.4 billion in 2017. This accounted for

approximately 26% of banks’ exposures to the property market or 13.3% of total outstanding

loans from banks.

Banks are resilient to withstand severe shocks from property market and related sectors

developments Bank Nagara Malaysia said banks are expected to have a solid assessment of

financing proposals for new property development or construction projects to avert default

risk. This includes banks should make robust assessments of the viability of projects, the

financial strength of the property developer and location-specific factors such as effects of

the development to properties in the surrounding area. This has triggered the impaired loan

ratio for the non-residential property segment became very low at 1.4% as at end-June 2018

(2017: 1.2%). Banks also had remained to have adequate capital buffers to absorb any

potential losses arising from a severe property price correction and the potential spillovers to

other industries that are highly dependent on the performance of the property sector.