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Rich debt, poor debt: assessing household indebtedness and debt repayment capacity

In: Financial systems and the real economy

Author

Listed:
  • Muhamad Shukri Abdul Rani

    (Bank Negara Malaysia)

  • Siti Hanifah Borhan Nordin

    (Bank Negara Malaysia)

  • Chin Ching Lau

    (Bank Negara Malaysia)

  • Sheng Ling Lim

    (Bank Negara Malaysia)

  • Zhen Shing Siow

    (Bank Negara Malaysia)

Abstract

In this study, we explore the relationship between the debt service ratio (DSR) and individual borrowers’ ability to withstand shocks in Malaysia. Using a micro-level dataset that matches borrowers’ debt and income, we quantify the financial resilience of individual borrowers and subsequently simulate a model of loan default and credit losses in response to generated financial and economic shocks on debt repayment, cost of living and variable income. The simulation allows us to differentiate the sensitivity of borrowers in different income segments to each shock and estimate the banking system’s exposures to borrowers who are more likely to default. The observations and findings could contribute towards the formulation of more targeted policies to manage household indebtedness in Malaysia. The results show that, in the pre-shock scenario, borrowers across all income groups are more likely to have a negative financial margin if their DSR is above 60%. However, for borrowers in the bottom 40th percentile income group, some borrowers with a DSR of less than 60% also recorded a negative financial margin. In the post-shock scenario, borrowers across all income groups are more likely to have a negative financial margin if their DSR is above 40%. On aggregate, borrowers are most sensitive to an income shock, particularly those in the middle income group.

Suggested Citation

  • Muhamad Shukri Abdul Rani & Siti Hanifah Borhan Nordin & Chin Ching Lau & Sheng Ling Lim & Zhen Shing Siow, 2017. "Rich debt, poor debt: assessing household indebtedness and debt repayment capacity," BIS Papers chapters,in: Bank for International Settlements (ed.), Financial systems and the real economy, volume 91, pages 153-168 Bank for International Settlements.
  • Handle: RePEc:bis:bisbpc:91-14
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    References listed on IDEAS

    as
    1. Tom Bilston & Robert Johnson & Matthew Read, 2015. "Stress Testing the Australian Household Sector Using the HILDA Survey," RBA Research Discussion Papers rdp2015-01, Reserve Bank of Australia.
    2. Marcelo Fuenzalida & Jaime Ruiz-Tagle, 2011. "Household Financial Vulnerability," Central Banking, Analysis, and Economic Policies Book Series,in: Rodrigo Alfaro (ed.), Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 10, pages 299-326 Central Bank of Chile.
    3. Nicolas Albacete & Pirmin Fessler, 2010. "Stress Testing Austrian Households," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 19, pages 72-91.
    4. Reuven Glick & Kevin J. Lansing, 2010. "Global household leverage, house prices, and consumption," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jan11.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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