If you have been to a bank to apply for a loan to start your business, you might have noticed that before granting you the loan the banker will do calculations and discuss your debt service ratios.
DSR stands as a pivotal measure in assessing an individual’s or entity’s financial health, specifically pertaining to their capability to manage and service existing debt.
This ratio, often employed by financial institutions, gauges the portion of income dedicated to debt repayment, including interest and principal payments.
Debt service ratio is a strong deciding factor before your loan gets approved.
This is to determine your creditworthiness whereby every record from your profession to the credit history will be taken into account.
What is a debt service ratio (DSR)?
In financial spheres, the DSR is a testament to one’s capacity to meet debt obligations without compromising other financial needs.
It is a deciding factor for lenders in loan approval processes and reflects on one’s fiscal prudence.
In the simple sense, DSR measures the ability of a person to settle their obligation to the debt.
It is the ratio of a person’s total debt to their household income. DSR is one of the three prime components to evaluate your risk profile.
The other factors which are taken into consideration by the bank are:
1) Maximum LTV (Loan-to-Value) / Margin of Finance available to you
2) Evaluation of your property
3) CTOS AND CCRIS report
How will DSR affect your loan eligibility?
In Malaysia, applying for a loan is not favourable if the DSR exceeds 70%. Lenders typically seek a DSR that doesn’t exceed 30-35% of one’s income, ensuring there is enough financial leeway for the borrower to manage unforeseen expenses.
Banks will use the DSR to determine:
- What percentage of your monthly income will be used to pay off the debts? and
- Whether you can afford to take up the loan, you are applying for.
If you have a low Debt Service Ratio, your loan application is most likely to be accepted as it means that you can easily pay back your loans and there is lesser risk of default payments.
The chances are high that your loan application will get approved if your DSR comes within the maximum allowable limit of the bank.
Ideally, DSR should be kept within a range of 30% – 40%, but this is not a strict limit as certain banks allow a DSR limit of 50% while others even up to 80%.
DSR limit varies according to various individuals and their respective levels of net income.
An optimal DSR not only facilitates loan approval but also empowers borrowers to negotiate better loan terms, highlighting the importance of maintaining a low ratio for financial leverage.
DSR Calculation
Debt Service Ratio can be calculated by the following formula.
DSR= (Loan you are applying + total monthly commitments)/Net income x100
Thus, in short, DSR is the net income (after EPF and income tax deductions) divided by the total monthly commitments.
You might be wondering, what exactly defines a commitment?
From the perspective of DSR, this includes all non-bank and bank debts.
Bank debt: Car loans, personal loans, credit card bills
Non-bank debt: This includes monthly repayments such as student loans, PTPN etc.
When it comes to income, banks only look at your net income after all the deductions such as taxes, SOCSO, EPF and so on.
To have a better understanding of DSR, let us take this example.
Let’s suppose your net income is RM7,000 a month, and your overall monthly commitments add up to RM1,000.
You are trying to get a loan with a monthly repayment of RM1,500.
Now RM2,000 + RM1,500 = 3,500.
If you divide this amount by your net income, i.e. 3500/7000=0.50
To find the percentage multiply it by 100, which will be 0.50×100=50%. This is a safe zone to apply for a loan.
Total monthly income(Net income)
Gross income = RM8,000 (Basic Pay+Allowance)
SOCSO Deduction: RM50
EPF Deduction: RM550
Tax Deduction: RM400
Monthly Net Income: RM7,000
Total commitments in a month
Car Loan: RM700
PTPTN Loan: RM100
Credit Card: RM200
Personal Loan: RM1,000
Total Monthly Commitments: RM2,000
DSR (without loan): (RM2,000/RM7,000) x 100% = 28.5%
With new housing loan repayment of RM1,200:
DSR (with loan): (RM3,700/RM7,000) x 100% = 52.85%
Types of Debt Service Ratio
The following are two broad categories of DSRs:
Home loans and DSR
The Mortgage Debt Service Ratio (MDSR) specifically calculates the percentage of income that goes towards servicing mortgage debt, an essential figure for potential homeowners.
Beyond Mortgages: Other Debts
The Non-Mortgage Debt Service Ratio encompasses other forms of debts such as credit cards and personal loans, offering a broader view of one’s debt obligations.
Payment components and their impact on DSR
Here’s a tabular representation of how various types of payments affect your DSR:
| Component | Impact on DSR |
| Mortgage Payments | Directly increases SDR |
| Credit Card Payments | Increases DSR |
| Personal Loan Payments | Increases DSR |
Why is DSR Important?
The Debt Service Ratio is important for two main reasons:
1) It shows how healthy your cash flow is.
2) It is one of the prime determining factors which will ascertain whether you are eligible for a loan or not.
3) Having a reasonable debt-service ratio (DSR) gives a person financial stability and maintains their ability to borrow money, providing a safety net and mental assurance.
4) For businesses, a good DSR demonstrates a strong ability to handle debt obligations, which can boost investor trust and enhance the company’s ability to secure future loans.
The Debt service ratio is a great way to monitor your financial success and earnings. By doing a calculation of DSR before putting forth a loan application, you will know whether or not you qualify to get a loan in the first place.
A high DSR indicates that you could get a loan from the bank with fewer hassles.
On the other hand, a low DSR indicates that you have trouble with your cash flow.
For banks and lenders, DSR is one of the main indicators while reviewing your loan application.
Some of the benefits of high DSR include:
- Higher possibility for getting a loan.
- Most likely to receive a good payment.
- Shows the financier that you have a greater cash flow.
- Helps to gain the banker’s confidence that you have the capability to pay back the loan in proper time.
Comparing debt service ratios to other financial indicators
Financial ratios act as a guide through the complexities of financial stability and decision-making. Understanding how DSR interacts with and differs from other ratios is crucial for a comprehensive financial analysis.
Debt-to-Income Ratio (DTI)
DTI contrasts with DSR by comparing an individual’s entire debt load against their total income, providing a wider perspective on their financial commitments.
How to improve my DSR?
Enhancing one’s DSR is not a sprint but a marathon, demanding consistent financial discipline and informed decision-making.
The following are some essential tips that you need to consider in order to improve your debt service ration:
1. Always pay on time
Make sure to pay your credit card statements and bills at the proper time. A small unpaid amount can blow up into a mammoth-sized debt, so always make sure not to have any leftovers.
2. Reduce your debt
If you have many debts from different sources, it will have a direct hit on your DSR. In such a case, the best idea will be to pay it off as soon as possible.
Prioritising high-interest debts and utilising surplus income to reduce liabilities can lead to a significant improvement in one’s DSR.
You could consolidate your debt into one loan, thereby simplifying the payment instead of running behind several deadlines.
3. Cut down on usage
One of the best ways to ensure a better DSR is to cut down on the usage of credit cards and loans to the maximum possible extent, especially if you are a person who spends onimpulse.
| Strategy | Potential Impact on DSR |
| Debt consolidation | Can lower DSR |
| Refinancing high-interest debts | May decrease DSR over time |
| Increasing income | Lowers DSR percentage |
Where can I find details of my commitments?
Your monthly commitments will include credit card bills, loans you have taken, PTPTN loans and so on.
The easiest way of tracking all these records will be through CCRIS.
CCRIS is a centralized database which gives a clear picture of your financial health.
Bank Negara Malaysia is regularly updated with details of your financial information from places such as
- Financial institutions
- Payment instrument issuers
- Government agencies
- Private utility companies
- Banks
- Credit leasing companies
- Insurance providers
This will help banks and other financial institutions to assess your financial health to evaluate your loan application.
The Bank Negara Malaysia helps financial institutions by providing credible reports to take effective lending decisions.
What is included in the CCRIS report?
CCRIS reports provide effective and accurate reports of a potential borrower. The information includes
Credit applications
This includes all the pending applications for credit which have been approved within the last 12 months.
Accounts for special attention
This refers to pending loans that are flagged by banks or other financial institutions. These accounts require special monitoring and means to recover the borrowed money.
Outstanding credit
This includes the past history of loans and credits obtained by the borrower, including those which are related to joint loans.
Who has access to CCRIS reports in Malaysia?
Once an application for request has been made, BNM provides the CCRIS reports to the relevant parties. This includes:
- Individuals: Who requests their own credit report
- Financial institutions: Who makes an appropriate request to the BNM
- Companies: Who requests their own financial reports
- Registered credit agencies: With the prior consent of the borrower
How to apply for my CCRIS report?
Before applying for a loan or making any important financial decisions, it will be a great idea to review your CCRIS report.
You could get your report through the following means:
CCRIS Online: The eCCRIS service is a great platform online where you can gain secure access to your CCRIS report when you need it.
Although this service is free, it requires initial registration through BNM Malaysia.
Once the registration is successful, you can check your report through the online portal.
In-person: A CCRIS report containing all your credit and financial information can be gained in person through a regional or the head office of BNM.
You should submit the filled application form along with a copy of MyKad and supporting documents such as a driving license or passport.
Another simpler method is by using a kiosk at any of the branches of Bank Negara Malaysia.
You have to insert your MyKad into the kiosk and place your finger to verify your thumb impression. Once your identity has been verified, you could get a printed copy of your CCRIS report.
Key Takeaways:
- Debt Service Ratio (DSR) measures the share of income used for debt repayment.
- Optimal DSR levels can indicate financial stability and creditworthiness.
- Calculating DSR accurately requires understanding its components and variations.
- Maintaining a favourable DSR is crucial for financial planning and loan approvals.
Bottom Line
In conclusion, DSR is a great tool for companies and individuals alike to plan their finances to minimise the debt they owe.
It serves as a barometer for financial health and creditworthiness. Whether you’re an individual looking to secure a loan or a nation gauging fiscal stability, understanding and managing your DSR is imperative.
You could follow some of the tips like:
- Trying to reduce your DSR within a range of 30-40%.
- If you are applying for a loan, try to know the maximum allowable limit of the bank before applying.
Finally, do not panic if you have a DSR of more than 50%. Having a good credit score will help you a lot in gaining the trust of financial organizations.
