This article first appeared in The Edge Malaysia Weekly on June 8, 2020 - June 14, 2020

BANK Negara Malaysia statistics show that ­credit card impaired loans rose noticeably in March than the preceding three months, before normalising in April.

Impaired loans in the segment rose 8.6% to RM391 million in March against RM360 million in February, RM359.8 million in January and RM357.5 million in December 2019.

In April, however, the situation “normalised” to RM366.2 million.

Is the March data for the segment a blip or a precursor of a worrying trend?

March marked the beginning of the Movement Control Order (MCO) in Malaysia, and since then, a considerable number of employees have lost their jobs or have had to take a pay cut.

Bankers note that the bump in impaired credit card loans in March was because the implementation of the MCO may have prevented some cardholders from making physical payments.

“It is still too early to determine the actual impact of the Covid-19 pandemic,” opines B Ravintharan, head of cards at Maybank.

“From our observation, we believe the increase in March was mainly due to slower payment as cardholders who are used to making physical payments were unable to do so as a result of the MCO. Recovery in the second half of March was also slower as collection efforts were reduced substantially,” he says.

The CEO of Group Consumer Banking at CIMB Group, Samir Gupta, says the bank is “tracking and closely monitoring the trend of impaired loans”, adding that the increase in March was mainly because customers had limited access to self-service machines for credit card payments due to the MCO.

He observes that the spike in March was just a “temporary situation” as the April and May figures have normalised.

Domenic Fuda, group managing director and CEO of Hong Leong Bank, also notes that there was a slight increase in customers making the March payment a little later than normal due to the advent of the MCO as well as the earlier confusion over the six-month loan repayment deferment/moratorium, which was announced in late March.

“After realising that credit cards were excluded from the loan repayment deferment programme, credit card payments were back to [their] normal trend in April,” he says, adding that there has not been any significant increase in Hong Leong’s credit card impaired loan balances.

Consumer banking earnings to be affected, impact ‘manageable’

CIMB’s Samir expects “consumer earnings to be slower in 2020” due to the economic downturn across all of the bank’s operating countries.

“The bank will play its role in supporting the economy and assist our customers to better manage their repayments during this difficult period,” he says.

The credit card business is parked under CIMB’s Consumer Banking — a segment that contributed 30% to its FY2019 profit before tax (PBT), making it the largest contributor.

It should be noted that credit card debts are not covered under the loan moratorium for mortgage and hire purchase borrowings.

Bank Negara’s website notes that although outstanding credit cards are not fully exempted from repayment, cardholders who have missed three consecutive months of minimum monthly payments will see their outstanding balances converted into a term loan/facility of up to three years in tenure, with an effective interest/profit of not more than 13% per annum.

“This will definitely help ease customers’ cash flow during this period as they will only need to pay the converted new instalment amount instead of paying the three months’ arrears,” says Samir.

CIMB has offered its customers the option to take up a term loan with lower interest/profit rate and lower monthly payments to ease their financial predicament.

In line with the industry relief plan, Maybank is automatically converting credit card balances, which are outstanding between 61 and 90 days, to a term loan of 36 months, Ravintharan says.

“Customers whose accounts are outstanding below 60 days also have the choice to participate in this plan. At the onset, we received encouraging responses from our cardholders for this relief scheme and believe that it helps them in managing their financial obligations better during this period. However, the number of applications has since stabilised,” he adds.

Ravintharan points out that, overall, the amount that has been converted to term loans is still relatively small compared with Maybank’s total cards portfolio and even though the effective interest/profit is lower, the “impact to the bank is still manageable”.

He adds that asset quality remains a key focus area for Maybank, with added vigilance following the onset of the Covid-19 pandemic.

“Active measures are taken to continuously monitor credit portfolios and client accounts for signs of stress, and to undertake necessary measures such as offering relief schemes, including restructuring and rescheduling (R&R) and moratorium, where applicable,” he says.

“For customers from certain industries that are directly impacted by the Covid-19 outbreak, we are proactively engaging them to offer a moratorium or to restructure and reschedule their repayments,” Ravintharan states.

Credit cards are parked under Maybank’s Group Community Financial Services — a segment that contributes 55.1% to group PBT for FY2019.

Hong Leong Bank has also introduced a Credit Card Relief Conversion Plan. This was initiated as early as February, and remains in place to complement the industry-wide six-month loan deferment programme provided to non-credit card customers.

Hong Leong Bank’s credit card customers have a choice of converting their outstanding balances into term loans, with the option to opt in for a 36-month instalment plan at an effective interest rate of 13% pa. (The flat interest rate is 7.1% pa).

Fuda shares that as of April, about 1.50% of the bank’s card holders have applied for the conversion plan — a positive sign, he says, as it shows that they are taking proactive steps to manage and meet their financial obligations. It will also enable the banking group to minimise any impact to its loan impairment and asset quality.

For customers who are unable to meet the minimum monthly repayment for three consecutive months, Hong Leong Bank automatically converts their outstanding credit card balances into the conversion plan.

Interestingly, about half of new loans in the banking system extended in 2019 to borrowers with a debt-to-service ratio (DSR) exceeding 60% were credit card and personal financing facilities.

Bank Negara notes in its Financial Stability Review for Second Half 2019 that as the borrowers have larger residual income and greater flexibility to adjust discretionary expenditures under adverse circumstances, the risk of defaulting on their loan repayments is likely to remain low.

“This is borne out by the consistent increase in recent years in the share of borrowers who settle their credit card balances in full every month,” the central bank adds.

This was looking at second half 2019 data, but the landscape has drastically shifted.

Nevertheless, in a recent exclusive interview with The Edge, Bank Negara deputy governor ­Jessica Chew points out that banks are going into this crisis from a position of strength and they are much more agile than before in responding to the current crisis.

“All the banks are well capitalised. We do see that they are aggressively and proactively managing their loan books. Many of them are going out of their way to reach out to their borrowers to understand their recovery strategies and business profiles ... how that will change post-Covid-19,” she said in May, adding that “what the banks do during these six months will be quite critical”.

Credit card spending slows

Recent Bank Negara statistics show that total credit card purchases — locally and internationally — have dropped.

In April, total purchases plummeted to RM6.2 billion from RM9.9 billion in March.

The amount was nearly half of February’s RM11.5 billion spend, and less than half of January’s RM13.9 billion.

This was also reflected in the number of card transactions, which dipped to 26.4 million in April against 39.5 million in March, 41.2 million in February and 47.5 million in January.

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