This article first appeared in The Edge Malaysia Weekly on July 19, 2021 - July 25, 2021

DATA from the Malaysian Department of Insolvency (MDI) shows that bankruptcy and winding-up cases continued their declining trend in 2020 and in the first four months of this year, likely supported by various government measures.

With the pandemic and the intermittent lockdowns throughout the last 1.5 years, one would expect to see a rise in bankruptcy and winding-up cases. After all, unemployment numbers have stayed elevated since the first lockdown in March 2020. Based on the latest available data for May 2021, the unemployment rate stood at 4.5%, a marginal improvement from the 4.6% recorded in April 2021. It marked a fourth consecutive decline for the year but is still high compared with the 3.3% that Malaysia had been familiar with before Covid-19 struck.

In 2020, there were 8,351 bankruptcy cases, and for the first four months of 2021, the number of cases amounted to 2,954. Bankruptcy numbers have been on a downward trend since 2016 when 19,588 cases were reported, steadily dropping to 12,051 in 2019, before the pandemic struck.

This trend continued despite the job losses reported and the economic recession in 2020.

One of the key reasons could be because the minimum threshold for an individual to file as a bankrupt has been increased.

The Temporary Measure for Reducing the Impact of Coronavirus Disease 2019 (Covid-19) Act 2020 raised the minimum debt threshold for the presentation of a bankruptcy petition to RM100,000, from RM50,000 previously. This temporary relief measure will remain in force until Aug 31, 2021.

Thereafter, the amendment to the Insolvency Act 1967 will come into effect. The amendment similarly sees the modification to the amount of indebtedness increased to RM100,000.

The last time amendments were made to the insolvency threshold was in 2017, when it was increased to RM50,000 from RM30,000.

Observers also note that the efforts like the automatic loan moratorium under the government’s economic stimulus packages to blunt the effects of lockdowns have also helped to hold off bankruptcy proceedings by financial institutions.

The Credit Counselling and Debt Management Agency, or better known as AKPK, also notes in its 2020 annual report that among the main reasons for the decline of approvals for its Debt Management Programme (DMP) in 2020 is the post-moratorium relief packages and the targeted repayment assistance programme offered by banks to help customers who have lost their jobs or face a reduction in income due to the pandemic.

The agency, which helps those in distress to restructure their loans, saw the number of DMP cases approved for 2020 decline to 29,758 from 48,581 in 2019, implying that there were less people needing DMP services in 2020.

However, if the 2,954 cases recorded for January to April 2021 were annualised, it could mean that the year may end with far more cases than in 2020.

Furthermore, economists have warned that the prolonged lockdown imposed on most states since June this year poses a risk to jobs as infection rates remain high.

It is worth noting that although the incidence of bankruptcy has declined in recent years, personal loans remain the main reason for bankruptcies, more so in recent years.

In 2016, personal loans as a reason for bankruptcy stood at 31%. By 2020, it was the cause for 53% of bankruptcy cases, and for the first four months of 2021, 54%.

Looking at banking industry statistics for May, the gross impaired loan (GIL) ratio has ticked up slightly across most consumer segments, with the exception of the credit card segment. The personal loan segment saw a GIL ratio of 2.02% in May, up from 2% a month earlier.

“With a second blanket loan moratorium in place until end-December 2021, the actual default position of the industry will not be apparent until 2022,” notes Maybank Investment Bank Research in a July 1 report.

For the overall industry, the GIL ratio stood at 1.59% in May compared with 1.57% in April.

Similar to the trend seen in bankruptcies, the number of compulsory winding-up petitions filed against companies in 2020 declined to 1,190 new cases from 1,966 in 2019.   

From January to April 2021, the number of new cases stood at a mere 192.

As for voluntary winding-up numbers, it declined in 2020 to 863 new cases, and stood at 503 for the cumulative four months of 2021 (4M2021). Back in 2019, the number of new cases of voluntary winding up stood at 1,216.

There is no doubt that the loan moratorium and other stimulus measures have helped to alleviate some of the hardship businesses have faced during the pandemic.

Close to all of the new cases under the compulsory winding-up status in 2020 and 4M2021 cite “not being able to fulfil debt obligations” as reasons for the compulsory winding up of a company.

Nevertheless, before 2020, the number of new cases of compulsory winding up had been increasing for three consecutive years: 1,157 in 2017, 1,419 in 2018, and 1,966 in 2019.

Voluntary winding-up numbers were choppier but still showed a rising trend, going from 1,131 new cases in 2017 to 1,216 in 2019.

Recall that just before the Covid-19 pandemic gripped the global economy, 2019 was the year where the trade war between the US and China was at its peak. The external uncertainties then weighed down on business sentiment.

While business sentiment was weak then due to the external uncertainties, it seems that sentiment is equally weak now, if not worse.

A Business and Economic Conditions Survey (M-BECS), carried out by the Associated Chinese Chambers of Commerce and Industry of Malaysia’s (ACCCIM), indicate that 62% of companies feel that their overall sales volume will decline in 1H2021 while 66.1% expect a decline in sales in 2H2021.

“At least one-fifth expect sales volume to drop by more than 30% in 2021,” says ACCCIM’s Socio-economic Research Centre executive director Lee Heng Guie.

The survey also indicates that 68.3% of businesses have no confidence of an economic recovery this year.

“Cautious consumer sentiment, reduced spending, restricted mobility and zero revenue for inoperative businesses have significantly dampened their cash flows, regardless of the size of operations. Of the ACCCIM’s survey of 442 companies, 77.1% of them are still concerned about cash flow, credit and cost,” notes Lee.

With all that said, whether or not the decline in bankruptcy and winding-up cases is sustainable will only become clearer in the near future after the moratoriums and government aid are unwound.

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