Are banks tightening lending at rock-bottom interest rates?

IT was reported that more than 600,000 Malaysian are out of work and severely cash-strapped, hence loans are their lifeline. Likewise, companies are also in dire need of fresh capital to survive.

But are banks willing to dish out more loans amidst the rock-bottom interest rates environment? Are banks tightening its lending requirements to ensure their delinquent loans do not rise substantially?

Recently, Bank Negara Malaysia (BNM) cut its overnight policy rate (OPR) by 50 basis points (bps) to 2%, a level last seen during the 2008-09 global financial crisis.

Sunway University Business School economics Professor Dr Yeah Kim Leng told FocusM that banks have been tightening lending standards ever since the central bank introduced macroprudential measures over the years to rein in the high household debts and property loans.

“However, the Covid-19 crisis has accelerated the impairment of company and individual balance sheets. The anticipated rise in bankruptcies, retrenchments and salary cuts will result in an uptrend in loan delinquencies,” he pointed out.

He said the heightened credit risk concerns are expected to result in more cautious lending to sectors severely impacted by the Covid-19 pandemic such as the aviation, travel and tourism-industries, restaurant and food outlets, retail, oil and gas, public transport and logistics service providers.

Nevertheless, Yeah said lending to vulnerable small and medium-sized enterprises (SMEs), low-income households and consumers with low credit scores will face greater scrutiny by banks.

“In response to heightened credit risk during an economic downturn, lending institutions are also expected to encourage corporate borrowers to access the financial guarantee provided by the government under the Covid-19 stimulus packages,” he noted.

Yeah added that banks are projected to maintain credit flows albeit at a more subdued level until the present health and economic crisis shows signs of abating. “A clearer picture of credit casualties will emerge in the second half and the credit tap will flow more quickly when the economy is on surer footing next year.”

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid opined that banks are just being mindful of the emerging risks coming from slowing or even contracting economy.

“Typically, asset quality or non-performing loans (NPLs) would typically deteriorate. In that sense, banks would be more vigilant especially in industries that are badly impacted by the negative shocks.

“Having said that, banks will still need to grow their assets as they are also answerable to their shareholders. And banking is about relationships. In that sense, customers who have been loyal to a particular bank and their repayment history has been very good would continue to enjoy financial facilities with attractive rates from the banks,” said Mohd Afzanizam.

At the same time, he said, transparency and full disclosure on the part of the customers would enable banks to have a better understanding of their customer’s nature of business. “Such confidence would be a plus point and smoothen credit flows to the customers.”

Meanwhile, Institute for Democracy and Economic Affairs (IDEAS) economics and business research manager Lau Zheng Zhou opined that BNM is adopting a more accommodative monetary policy in the hope of stimulating economic recovery through loan expansion, among others.

“The OPR cuts and upsizing of the Special Relief Fund (SRF) by another RM5 bil are all expected to stabilise and promote economic recovery.

“While banks share concerns over NPLs and the implications of absorbing the costs of the accrued interest payment as part of the loan moratorium, the banks are still expected to increase lending rather than tightening because there is a cost in not putting money in reserves to work.”

He said the government has introduced measures like providing working capital guarantee through Credit Guarantee Corporation Malaysia Bhd and Danajamin Nasional Bhd which will help to improve the credit quality of businesses in securing loans from banks.

“Doing so will also mean the government and the banks shoulder the risk of defaults and should, therefore, encourage banks to increase lending,” said Lau. – May 13, 2020

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