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Household debt on the rise - Personal loans climb to $308b

Published:Thursday | April 12, 2018 | 12:00 AMSteven Jackson

Jamaican households are increasingly living beyond their means as more than half of their disposable income goes towards paying back loans, a trend that concerns the financial stability committee enough for it to consider studying its drivers.

Household debt reached its highest level in a decade, with more than half of disposable income - that is, $54.20 of every $100 - going towards the servicing of personal loans, as at last September, according to the Fiscal Stability Report 2017 released by the central bank this month.

Last year, the ratio of real household debt to disposable income deteriorated at 54.2 per cent was trending well above the 10-year annual average of 42.9 per cent, said the report.

In the most recent breakdown of loans issued by commercial banks, personal loans are at the highest level they ever been, according to provisional data compiled by the bank of Jamaica (BOJ).

As of January 2018, the loan market in the commercial banking sector was valued at $616 billion, with personal loans accounting for $308 billion of the industry total. One of the drivers of the trend has been reported to be increasingly attractive auto loans that are now priced at single-digit rates.

A decade ago, the year-end ratio was 38 per cent, and the decade before that it was 19 per cent, according to central bank data.

The debt servicing burden of households has generally trended upward since 2011, the stability report itself noted.

It also noted that the stable macroeconomy as well as the Government of Jamaica's reduced need for debt - eliminating its crowding out effect - has created an opportunity for expansion of private sector credit. Within this context, the Financial System Stability Committee (FSSC), which is chaired by the governor of the central bank, says it intends to pay more attention to the potential risks associated with rising household and corporate debt.




"Therefore, it is the committee's view that suitably anonymised granular loan level data is particularly important for Jamaica's macroprudential surveillance, and as such, the committee recommends the expansion of Bank of Jamaica's analysis based on its use," said the FSSC in a separate statement that followed publication of the stability report.

FSSC is a statutory committee which provides oversight of financial stability assessments prepared by BOJ staff. It has eight members, among them the BOJ governor as chair and other officers of the central bank - the financial secretary, executive director of the Financial Services Commission, and CEO of the Jamaica Deposit Insurance Corporation.

Two years ago, BOJ revised its definition of the debt serving ratio which changed the calculation of household debt as a share of disposable income. It resulted in a near 20-point reduction in the ratio.

Specifically, prior to the revision, the 2015 report indicated that household debt servicing worsened by three percentage points year on year to 69.5 per cent in 2015, which meant that roughly $7 of every $10 of household income went to paying down debt.

The growth in household debt rose alongside changes in the banking sector, but it was also occasioned by increased employment levels, the stability report noted. Last year, Jamaica's largest building society and a merchant bank converted to commercial banks, growing the sector to eight players.