Interagency council tags household debt risks
Household debt in the Philippines remains “relatively low” but family financial vulnerabilities could pose risks to the banking sector, the interagency Financial Stability Coordination Council (FSCC) said on Tuesday.
“Household indebtedness, derived from the expenditure accounts of FIES (Family Income and Expenditure Survey), is relatively low at P185 billion or 8.4 percent of indebted households’ income,” the FSCC said in its just-released 2017 Financial Stability Report.
It noted that household indebtedness was growing at a moderately steady pace of about 6.5 percent per year but added that survey findings also indicated a close to zero financial margin for a significant portion of households.
“This implies low annual savings and difficulty in making ends meet,” the FSCC said, noting that in 2015, around 20.6 percent of indebted households had negative to zero financial margins while an additional 11.7 percent had less than P10,000 in extra money.
The thin financial margins suggest a vulnerability to tighter financing conditions and increased likelihood of default.
The FIES also found that next to cash loans, the second most accessible debt for households were loans granted to persons outside the family. The FSCC said that this type of loan, which can be considered debt sourced from informal markets, was prevalent in lower income households.
“Given thin financial margins of this household segment, creditors are exposed to counterparty payment default risk,” it said.
Affluent households, meanwhile, had higher exposures to more expensive long-term debt such as real estate and vehicle loans.
“These loans make them more vulnerable to movements in interest and FX (foreign exchange) rates, and are thus, subject to higher repayment, refinancing and repricing risks,” the FSCC said.
Among the income quintiles, more affluent households had higher debt participation and higher average debt.
Their “underrepresentation” in the survey, the FSCC warned, “results in underestimation of household expenditures and debt.”
The report emphasized that while the FIES offers an alternative glimpse of the country’s household debt profile, additional information is required to more accurately capture the financial vulnerabilities of households.
A new survey, the FSCC said, “should incorporate improvements over the observed weaknesses of the FIES such as including wealthier households in the sample.”
The 2017 report is the first collaborative publication of the FSCC as well as the first for the Philippines to be made publicly available.
The FSCC is a voluntary interagency body composed of the Bangko Sentral ng Pilipinas, Department of Finance, Insurance Commission, Philippine Deposit Insurance Corporation and the Securities and Exchange Commission.
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