Experian i-SCORE Analysis Reinforces the Urgency to Address Low Credit Health Awareness as Malaysian Consumers Gear Up for Longer Term Impact of COVID-19 Economy
Experian Information Services (Malaysia) released its analysis of consumer credit score trends and credit loans across different age groups for 5 quarters, from 1Q2020 to 1Q 2021, which spans the first and second Movement Control Orders (MCO). With a base of 5.7 million individuals, the analysis also highlighted the rate of change in delinquency by risk grades using Experian’s i-SCORE consumer credit score assessment.
Experian also announced the launch of Know Money Campaign as part of Experian’s ongoing initiatives to provide holistic education and empowerment to improve financial literacy in the country.
Experian i-SCORE is a consumer credit score in Malaysia. It is based on the statistical analysis of a consumer’s credit files to derive a numerical score ranging from 300 to 800. The scoring is typically used by lenders to ascertain the creditworthiness of an individual before approving or rejecting an application. A higher Experian i-SCORE indicates a lower credit risk to lenders.
Younger consumers make more credit applications while older consumers stay conservative in credit applications as impacted economy extends
The Experian i-SCORE analysis studied credit facilities, such as credit cards, personal loans, overdrafts, mortgages, vehicle loans, government & education loans, etc. among those aged from 22 years to 65 years and above for the period of 1Q2020 to 1Q2021.
The loan application volume decreased across all age groups when Malaysia went into MCO 1.0 in 2Q2020; most noticeably in consumers aged 51 and older (-56% & -57% respectively for the two most mature age groups). Malaysians aged 51 years and older continue to be conservative on new loan applications throughout 2020 and the first quarter of 2021. Many in this age group are adopting a wait-and-see approach and prefer to defer taking on new credit lines.
On the flip side, younger consumers aged 22-35 years old applied for more credit as the impacted economy wore on into MCO 2.0 at the start of 2021 (1Q2021). This was primarily driven by those aged between 22 and 28 years old, with an increase in loan applications at 37% in 1Q2021. A similar trend was also observed among those aged between 29 and 35 years old (22%), albeit moderate in comparison to the younger age groups.
Bank Negara Malaysia (BNM) highlighted that 47% of Malaysian youths have high credit card debt. Most of the bankruptcy cases were mainly due to the inability to sustain debt comprising instalment purchases, personal loans, and credit card debt. This is concerning as it reflects the level of financial literacy among Malaysian youths.
“The low level of financial literacy, especially awareness around credit health, has always been a challenge for Malaysian youths. Our latest Experian i-SCORE analysis reinforces the urgent need to educate Malaysians about the importance of credit health. This is critical as the uncertainties around the COVID-19 impacted economy persists, both as a nation and on an individual level. Experian’s Know Money Campaign is part of our long-term commitment to improve financial literacy in Malaysia. Through this campaign, we hope to continually educate Malaysians about the importance of credit health so they understand that it’s the first and vital step to better personal financial control and management in the long term,” said Dawn Lai, Chief Executive Officer of Experian Information Services (Malaysia) Sdn. Bhd.
Moratoriums have helped consumers in the weak credit score segment the most, but they may be at higher risk for delinquency as moratoriums lift in the future
i-SCORE risk grades categorise individuals into groups of weak, fair, good, and strong. The graphs denote the percentage change in the average i-SCORE of each Risk Rating as compared to the corresponding average i-SCORE during the pre-moratorium year in 2019.
The risk ratings have remained relatively unchanged for individuals rated in the fair, good and strong categories. However, the ‘weak’ rated individuals are most at risk for delinquency in general, as they are most often affected by poorer repayments. According to the Economic Action Council (EAC), more than 600,000 households from the M40 income group have slipped into the bottom B40 category as the COVID-19 crisis has delivered a major blow to the incomes of Malaysians. However, the various repayment schemes, (i.e., payment freeze, restructuring, targeted deferment), have given temporary score boosts and these are expected to normalise upon the ending of these initiatives. The banking sector’s moratorium measures driven by the government had helped with the normalisation of credit score performances, particularly for individuals with weaker scores.
The Association of Banks Malaysia (ABM) encourages borrowers to start repayment, if they are able to, as resuming repayments would reduce their overall cost of borrowings. For those who are still having challenges resuming repayments, they will have to proactively reach out to their bank(s) for further assistance. However, consumers with traditionally weaker scores may be at greater risk when Malaysia moves out of moratoriums. They would have to pay greater attention to how to navigate through managing credit more so than ever.
Delinquency rate change has been kept low due to the moratoriums, but consumers should take proactive measures to manage their credit health during prolonged volatility
Comparing 3Q2020 to 3Q2019, early delinquency rate (60 days past due) is seen to be lower, after both the blanket and targeted moratoriums. This is in line with a report by BNM, where it highlighted that with targeted repayment assistance measures that have remained in place, household impairments and delinquencies in the banking system only marginally increased after the end of the blanket auto-moratorium. Household loans in stage 2, classified as “Underperforming” have increased to 7.3% (June 2020: 5.6%), reflecting increased credit risks among household borrowers.
Efforts have been made by financial institutions to help those significantly affected during the pandemic with the extension of the blanket moratorium. This coupled together with financial institutions tightening of lending criteria during the pandemic, have resulted in artificially low short-term delinquency rates. As we move out of moratoriums, consumers who had their delinquency rates artificially lowered would now need to be ready to manage their loans more proactively and improve their repayment performance – with the right knowledge, know-how and consistent tracking of payment performance.
In light of this, the Know Money Campaign plays a pivotal role in increasing credit health awareness and highlight the importance of maintaining good credit health in managing personal finance for the immediate period and into what may be a protracted and depressed economic environment.
“Personal finance has never been an easy topic to broach, but the situation that we are in today makes it increasingly complex to identity definitive indictors of consumer credit stress. It is of paramount importance that we help consumers and Malaysia to be more financially literate immediately and for the future. Strategic partnerships will be the key to achieving this. We look forward to working with various partners to achieve this ambition,” concluded Lai.
In conjunction with Credit Health Month in July, Experian is offering consumers a free personal credit report which includes their Experian i-SCORE and Central Credit Reference Information System (CCRIS) data. In addition, it will provide 50% off all other consumer products throughout the month. To bolster continuing outreach on financial education, several free educational and engaging activities, in partnership with Agensi Kaunseling & Pengurusan Kredit (AKPK), iMoney and RinggitPlus, will be rolled out in phases in the coming months.
Source: Experian Malaysia