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Slowdown In Bank Loans A Double-Edged Sword?
Malaysia Perspective | 30 April 2012

By Predeeben Kannan

The stricter measures implemented by Bank Negara last year to curb household debt, have since been implemented this year. Early indications reveal that it is beginning to affect all common purchases on credit at the early stages of implementation. Based on statistics recently released by Bank Negara, loan growth moderated for the second consecutive month, ticking upwards by only 11.9 percent year-on-year in the month of February 2012. This follows a much slower 12.1 percent growth in January 2012 year-on-year. Conversely, Business loan approvals saw its second month of decline as approvals dropped by 21 percent mont-on-month in February 2012, compared with a drop of 24 percent in January 2012. This is largely due to slower approvals for construction and working capital loans.

However, there was reprieve in the form of better retail loans growth. Mortgage loans grew 25 percent month-on-month in February 2012 and loans for purchase of residential property grew by some 24 percent during the same period. Probably the only blotch in retail loans growth were the figures from hire purchase loans, where it recorded a drop of 3 percent in February 2012, compared with a 12 percent declines in January 2012.

The retail sector felt the most impact from the “responsible lending” guidelines implemented by Bank Negara beginning 1 January 2012. Consumers in general felt restricted as their loans were now approved based on net income as compared with gross income previously. In addition, consumers would need to provide additional documentation for approval purposes.

As a consequence of the new rules, some potential borrowers were no longer eligible for certain types of loans. This resulted in the steep 25 percent drop in passenger cars sold in January 2012 year-on-year. Another significant drop was the credit card segment which fell by a further 50.9 percent in January from a decline of 10.2 percent in December 2011. Applications for loans for the purpose of purchasing residential properties contracted 6.3 percent in a turnaround from an 11.3 percent growth in December 2011.

The Association of Banks in Malaysia (ABM) was quoted in the media saying that the implementation of the guidelines will not have a direct relation to its member banks’ loan growth:

“The guidelines merely set out to better define the expectations of banks to act responsibly and transparently when lending. The policies and practices envisaged are not entirely new as they underscore the existing approach taken by our members. While it will ensure that the debt commitments of individuals and households are within their repayment capabilities, customers who can afford to repay will not be denied access to financing”.

Feeling the Effects of Belt Tightening

In a recent interview with a local daily, Real Estate and Housing Developers Association (REHDA) president, Datuk Seri Michael Yam said that housing purchase transactions are now taking a longer time to materialise as banks are grappling with more data required for processing loan applications.

“Buyers are also not committing to purchases until they get clearance from banks that they will be offered the loan applied for, which may or may not be sufficient for them to purchase the property they desire,” he added.

He reiterated that the affordable housing segment will probably be the most affected segment as buyers and by extension, borrowers, are likely to be less affluent, with lower income and have disproportionately higher expenditures.

Most analysts believe that in the near term, the effects of the new guidelines would ultimately result in a slowdown in the various sectors that depend on lending growth. It is especially so for the housing sector, with first time buyers feeling the most heat due to the higher net salary requirement and the need for more documentation, which they might not necessarily have at the early stages of their career.

Another sector feeling the heat from the new guidelines is the motor vehicles sector. According to the Malaysian Automotive Association (MAA) president, Datuk Aishah Ahmad, while the MAA commends Bank Negara’s action in promoting prudent and responsible financing practices among local financial institutions, she feels that imposing more stringent financing conditions for hire purchase loans under the present economic environment will not help to stimulate the market and instead make it worse.

“MAA recognises that banks will naturally be more apprehensive about lending in the current uncertain economic outlook. However, we feel banks must not be too cautious and stringent in providing loans as this will inadvertently have a negative impact on the overall economy and the automotive sector would be one of the sectors earliest to be affected.”

She believes that the new lending rules have impacted the sales of new vehicles and will ultimately result in reduced revenues for the Government in the form of lower taxes and duties.

Better for Long Term Growth and Sustainability

Despite criticism, there are positives that far outweigh the downsides of the implementation of these new measures. For one, it would encourage borrowers to be more prudent and think twice before committing themselves to excessive loans. At first glance, the new measures seem to be paying off as the occurrence of non-performing loans and loans in arrears appear to be falling.

According to Bank Negara’s Financial Stability and Payment Systems Report 2011, the growth of household debt to gross domestic product (GDP) increased last year but the pace was much slower, with outstanding household debts expanding by 12.5 percent to 76.6 percent for the year compared to 2010 when debt grew 13.7 percent to 75.8 percent. Despite the slower pace of growth, the ratio of 76.6 percent is still relatively higher as compared with regional neighbours. Therefore, many see Bank Negara’s timely intervention as necessary in preventing the population from being saddled in debt.

Experts believe the stricter lending guidelines are necessary to ensure quality loans growth, especially with Ringgit deposits slowing down. This situation has encouraged banks to stymie their lending activities in anticipation of Bank Negara’s new guidelines.

Malaysian banks are now progressively looking at other areas to stimulate loans growth. A number of them are targeting the small and medium enterprise (SME) segment. This segment is expected to provide better margins in the long run and thus make up for the shortfall in slower loan growth from the stringent guidelines.

Analysts believe Malaysian banks would continue to grow in the coming years. This view is shared by ABM which believes that in the long run, the implementation of the guidelines will not have a direct relation to its member banks’ loan growth. Instead, factors like global economic conditions and its impact on the regional economy as well as developments on the external and domestic front will be more influential factors that play a part in deciding actual loans growth in the country.

* Information from various sources

The views expressed in this article are those of the writer. Predeeben Kannan has more than 15 years senior level experience at various media organisations in Malaysia and Singapore. For more dialogue, please e-mail

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