KUALA LUMPUR (Aug 13): Bank Negara Malaysia (BNM) governor Datuk Nor Shamsiah Mohd Yunus claimed today that the Covid-19 pandemic-driven loan-repayment assistance offered by Malaysian banks to borrowers has been the most extensive by any country in terms of scale and scope, hence, it is critical for banks here to remain sound to continue providing such help.
Nor Shamsiah said there would be "serious ramifications" if banks here were to waive accrued interests on consumer and business loans due to banks' critical roles in the economy.
Speaking at a virtual press conference today in conjunction with the announcement of Malaysia's economic data for the second quarter of 2021 (2Q21), she said interest income accounts for about 80% of the local banking sector revenue.
According to her, small- and medium-sized enterprise loans that are eligible for automatic opt-in loan-repayment moratorium amount to about RM1.4 trillion or around 73% of total banking system loans in the country.
She said that if the government instructs banks to offer interest-free loan-repayment moratorium to borrowers, banks will have to pull back lending to conserve financial buffers, especially with higher credit losses still expected to emerge.
Secondly, banks’ credit ratings may be downgraded to reflect weaker future earnings and this will make it more expensive for banks to raise capital, Nor Shamsiah warned.
She said banks' higher cost of funds will be passed on to borrowers.
“Thirdly, confidence in banks will be affected, which could trigger liquidity stress,” she said.
According to her, depositors are concerned about the safety of their cash deposits with banks as banks’ liquidity stress resulting from interest-free loan-repayment moratorium to borrowers will jeopardise interest payments to cash deposits and adversely affect banks earnings.
Fourthly, she said that by offering interest-free loan-repayment moratorium to borrowers, banks will not be able to pay dividends to retail investors and institutional investors that hold public savings to liquidity stress.
The absence of dividends from banks will result in lower returns for consumers who invest their money in funds which in turn park the money in Bursa Malaysia-listed banking shares, according to her.
“When you take all this together, this will significantly hurt economic recovery and have longer term ramifications for our economy and financial system,” she said.
BNM is mindful of banks' anticipated higher non-performing loans (NPLs) amid the pandemic-led economic situation.
According to Nor Shamsiah, the increase in loan impairments is more dependent on economic conditions given the uneven recovery, rather than the loan-repayment moratorium, which only provides temporary relief to borrowers.
Nor Shamsiah said the impact of rising NPLs remains manageable for banks in the country because they have built up their financial buffers in the form of capital and loan-loss provision over the years and during the pandemic.
Based on the Malaysian banking sector stress test, she said the local banking system can withstand pressure during severe macro-economic and financial conditions.
“This is largely due to the series of banking sector reforms [following the 1997] Asian financial crisis and the [2007-2009] global financial crisis,” she said.
She, however, emphasised that banks' policies must take into account other aspects of financial stability, particularly, sustainable lending activities and preservation of confidence in the financial system as these measures are critical to ensure that banks here are in a strong position to support the nation’s economic recovery.
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