BUSINESSES will find it even harder to secure financing this year as banks are remaining cautious about lending amid the economic slowdown. This may not be a good sign for Malaysia’s economy.
Last year, banks’ loan-to-deposit ratio (LDR) rose further and reached a 10-year high of 89.8%. According to Bank Negara Malaysia’s latest statistics, the LDR stood at 89.7% as at end-December, as a steady yearly loan growth of 5.3% outpaced the slower deposit growth of 2%.
That it is now closer to the higher point of the optimal LDR — within 85% to 90% — seems to have put some banks in a tight spot. While the credit cycle had already seen a softening trend over the last two years, the current situation raises concerns that should it persist, it may lead to a slowdown in economic recovery.
Weak loan growth during an economic slowdown is understandable as business sentiment almost always turns cautious. However, the higher LDR may also be interpreted as banks not having much spare capacity to lend even though there is demand for loans.
Already, some small and medium enterprises (SMEs), whose businesses are struggling, are feeling the heat as some local banks have begun revaluing their financing facilities since the beginning of this year.
According to Michael Kang, president of the SME Association of Malaysia, banks recently reduced their loan facilities to SMEs, which have seen their businesses decline in the past two years. The association will have a discussion with Bank Negara in the middle of this month with regards to the issue.
“Amid the economic downturn, banks started to worry that SMEs would face financial issues. Some of those that have taken out loans have indicated that their banks have pulled back their loan facilities, while some expect that to happen soon,” Kang tells The Edge over the phone.
According to him, the SMEs are experiencing a tough time as 85% of them are focused on the domestic market. Last year, they saw their sales fall by a third amid weak domestic demand. Their cost of doing business has also increased at least 10% owing to the implementation of the Goods and Services Tax, the weaker ringgit and higher labour costs.
It has been learnt that the Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM) recently submitted a proposal to Bank Negara to give SMEs more time to restructure their debts.
But the central bank said that debt restructuring decisions should be left to the discretion of individual banks, an executive from ACCCIM tells The Edge over the phone.
When contacted, a senior executive of a local bank says the bank has a cautious stance on certain sectors, such as publishing (provision of printing services) and property investment. It usually evaluates a company based on its financial performance over the past three years. “If its turnover cannot keep up with growth, we may need to adjust our credit limit,” he explains.
Most economists do not think that Malaysian banks are facing a lending capacity issue as they can still access the capital market for funds. However, banks tend to turn cautious on lending when the economic weather becomes harsher. Thus, some believe this will form a vicious circle that will adversely impact the economy.
“The credit cycle has seen a softening trend over the last two years and it’s the lack of deposit growth that has caused the LDR to rise. As it stands, banks that suffer from a tightness in funding are … borrowing from the interbank market by offering higher deposit rates or through other means,” says Lim Chee Seng, chief economist of RHB Research Institute. He adds that banks may have been cautious in lending due to asset quality issues caused by a slowing economy.
Should the scenario persist, he opines that banks may have to compete for deposits by offering higher rates via deposit campaigns. This will raise their cost of funding, which may eventually be passed down to borrowers and, in the process, slow down credit growth and dampen economic growth.
“As challenging economic conditions prevail, certain businesses will become more vulnerable. It stands to reason that banks would become more cautious about lending to such businesses. This reduction in risk appetite could [lead to] slower loan growth in 2017,” Malaysian Rating Corp Bhd vice-president Sharidan Salleh tells The Edge in an email. He says the rating agency expects the economic conditions to remain challenging.
Sharidan says the contraction in deposits seen by banks is mainly due to lower business deposits as a result of weakening corporate earnings. He adds that banks’ margin could come under pressure if they source their funds from the capital market, whose cost is higher.
Socio-Economic Research Centre (SERC) executive director Lee Heng Guie opines that banks should not overreact to the economic uncertainty and should find the right balance because their actions may have a negative impact on Malaysia’s growth. The country is not experiencing a financial crisis, like those seen in 1997 and 2008, thus banks should provide some “hand-holding” to businessmen to support them in these tough times, he says.
According to Maybank Investment Bank chief economist Suhaimi Illias, the industry’s loan to fund and equity ratio, which is at 75%, indicates that the banking system still has ample room to lend.
“As for the banking industry’s somewhat cautious stance on lending, it reflects the combination of tightening regulations on capital requirement and risk management, uncertainties on the outlook of some industries such as oil and gas, property and, of late, trade-related sectors, and the need to manage costs in view of the net interest margin (NIM) compression and to manage asset quality,” he tells The Edge in an email.
Suhaimi, however, continues to see loan growth in sectors such as infrastructure-related construction and transport as well as services, including wholesale and retail, education and health, underpinning the pick-up in business loans amid slowing growth in household loans. To him, the slower growth in household loans is not solely due to Bank Negara’s macroprudential measures and the banking system’s tighter lending standards. It also reflects voluntary deleveraging by households given the evidence of “dis-savings” via withdrawals from Employees Provident Fund savings to settle or repay debts such as study loans and mortgages.
He has observed a trend of declining loan applications and approvals, and expects a slower growth in industry loans of 4.7% this year against a pick-up in deposit growth to 3%. As such, he does not anticipate a spike in the LDR.
Malaysian Institute of Economic Research executive director Dr Zakariah Abdul Rashid believes that the key issue is that the economy is in a dilemma as the government’s strategic reform initiatives (SRIs) are being implemented when the external and internal environments are not favourable.
To Zakariah, SMEs contribute more than 95% to enterprise establishment, and as most of them are domestic-oriented, they will be the first to suffer under the SRIs.
He opines that external uncertainties such as Brexit, newly-elected US President Donald Trump’s protective measures and the strengthening of the US dollar, as well as internal issues such as political concerns and inflation have affected Malaysia’s economy quite significantly.
Banks have been called fair-weather friends. However, to be fair, rising bad debts does not augur well for the economy as it would cripple the financial system if banks are not prudent on lending. As SERC’s Lee says, the financial institutions should try to find the right balance.
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