Banks have more to lend now but loan demand is weak

This article first appeared in The Edge Financial Daily, on November 11, 2019.
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KUALA LUMPUR: Bank Negara Malaysia’s (BNM) move to reduce the statutory reserve requirement (SRR) ratio to 3% from 3.5% bodes well for the local banking industry.

The banks will have more money in hand to lend out. As loan growth strengthens, so does the domestic economic growth.

The 0.5% cut in SRR is expected to release RM7.35 billion into the banking system.

This might be an ideal situation policymakers are looking at. The reality is rather different, mainly because demand for loans is not that robust, according to banking analysts.

RHB Research analyst Fiona Leong opines that the SRR cut may not be able to improve loan growth significantly.

“A cut means the liquidity will be released back to the banking system. But if you looked at the system’s loan growth, the problem is not so much on the liquidity within the system that contributes to the soft loan growth.

“The (loan) growth has been soft because the demand is weak. Even BNM cuts the SRR to put money into the (banking) system, it is not going to help much,” said Leong, adding that the weak loan growth is attributable to subdued business performance.

That said, Leong pointed out that banks will still benefit from the SRR cut although they may not be able to lend out as fast.

“Even if banks are able to utilise the extra liquidity for commercial and consumer loans, they would probably put into interbank lending market. That means banks can get better yields for their funds by doing so,” she explained.

When contacted, Inter-Pacific Securities Sdn Bhd research head Pong Teng Siew concurs with the view that loan demand is not that robust but banks will still be the beneficiaries of lower SRR.

“BNM uses this to encourage banks to lend more, but the loan demand is not that great. So it is likely that the additional liquidity is going into money market to earn minimal return,” Pong told The Edge Financial Daily.

He said the weak demand for loan is attributable to weak consumer sentiment, while businesses are not borrowing for new investments or adding capacity.

“Very often businesses borrow more when the ringgit weakens, which means they are borrowing for inventory holding, particularly inventories that are in foreign currencies, instead of new investments or new orders,” he said.

Last Friday BNM announced that it is lowering the SRR effective Nov 16, to maintain sufficient liquidity in the domestic financial system.

The last time it cut the SRR was in February 2016 when the ration was reduced to 3.5% from 4%.

BNM’s data shows that loan growth is on a declining trend since November last year, when total outstanding loan grew by 8.3% year-on-year (y-o-y).

Loan growth for September this year eased further to 3.8% y-o-y, the fourth consecutive month of decline.

Socio-Economic Research Centre executive director Lee Heng Guie said the liquidity easing measure is going to help ease the cost of fund and boost credit growth, provided demand for loan improves.

“The SRR reduction is only warranted if there is tightness in the financial condition. The cut after the MPC [Monetary Policy Committee] meeting gives rise to expectations of further dovishness in the monetary policy going into 2020,” he said.

“Looking at consensus estimation by analysts after the last MPC meeting, most of them are expecting at least one overnight policy rate (OPR) cut next year. To me, SRR is a different thing, it is about liquidity.

“BNM has lowered the rate for SRR to ease banks’ liquidity, which had created the impression of the country’s economy remain soft and banks are facing tightness in liquidity,” he added.

Meanwhile, another economist opines that the reduction in SRR is an extension of the accommodative measures by BNM after the 25-basis-point cut in OPR in May this year.

“Certain banks out there, particularly the smaller ones, may be facing either higher demand for loans or having lower deposits, so this will help ease their liquidity pressure,” he commented.