Despite dovish comments on the outlook of monetary policy from US Federal Reserve Chairman Ben Bernanke on Wednesday, more and more Asian economies are expected to roll out measures to rein in household credit growth, with the latest coming from Malaysia earlier this month.

Since Bernanke set out the US central bank's strategy for ending quantitative easing in May, Asian markets have faced higher volatility and higher core interest rates.

While Bernanke stressed last week that he would not raise interest rates for "some time" and that the Fed's accommodative monetary policy is needed for the foreseeable future, Asian central banks are not taking chances in light of possible change in monetary policy in the US, with some already taking steps to curb credit growth led by a property boom.

Bank Negara Malaysia announced on July 5 new measures to cap household debt such as reducing maximum tenure for mortgages from 45 years to 35 years. The measure came soon after Standard Chartered Research had released a report assessing credit risks of Asian economies, which said Malaysia household debt has crept up further to 83 percent of GDP as of end-March 2013 from 80 percent at the end of last year.

The Monetary Authority of Singapore (MAS), the de facto central bank of the city-state, earlier released a framework to cap the total debt-servicing ratio of property loans to 60 percent of income, including on non-property loans such as car loans.

While the MAS said the framework is not intended as a property cooling measure, this latest measure, along with that of Malaysia, has highlighted increasing concerns among the Asian central banks about the household credit risk likely to arise from higher borrowing cost when the US starts to wind down its monetary stimulus program.

The concerns are not unwarranted as cheap credit and high asset price have caused household debt in many parts of the region to pile up recently. Warning signals are already flashing as household borrowings relative to income are even higher in some Asian countries than they were in the US in 2007 at the onset of the consumer credit crisis.

According to Standard Chartered Research, rapid credit growth led by mortgages have led to high leverage in average households of Malaysia, Singapore and Thailand. Although solvency stress indicators signal no immediate crisis, a continuation of this leverage growth trend could trigger future deterioration of credit quality in these countries.

Hence, the build-up of household debt led by mortgages merits closer scrutiny as any future spike in credit costs could dampen consumption that in turn could adversely affect these economies.

Furthermore, preemptive moves  to promote financial prudence at household level are necessary at this juncture, also partly due to anticipation of slower economic growth ahead in the region.

Global Times