The role of financial institutions

By Samantha Joseph

In previous articles, KiniBiz pointed out that banks and non-bank financial institutions (NBFIs) service different sectors of society and would have different impacts as a result of BNM’s new regulations. In this final part of our series, we look at the problems resulting from the NFBIs’ giving of personal loans and BNM’s efforts to ensure that everyone lives within his or her means

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Simon Chen of Moody’s noted that previous measures by BNM, including 2012’s Guidelines for Responsible Financing, were not effective in reigning in NBFIs. “Prior measures…allowed non-bank financial institutions, including developmental financial institutions and cooperatives, to continue to fuel the consumer credit boom, particularly in unsecured personal loans”.

Banks, meanwhile, were supported by capital buffers of more than RM80 billion at the end of 2012, as well as ample domestic liquidity and a low number for impaired loans at 1.5% of the bank’s household ratio.

Banks

For banks, BNM’s regulations may not be particularly painful, especially compared to the potential impact faced by non-banking financial institutions (NBFIs). Despite holding 80.7% of financing of total household debt, analysts expect a limited impact on the banking sector, partly due to factoring-in a moderation in the projected industry loan growth for the year and also thanks to prudent measures taken by banking institutions.

Maybank IB’s Desmond Ch’ng noted in his report that “Our projected industry loan growth of 10.7% this year assumes household loan growth of 10.5% and non-household loan growth of 11%. We forecast industry loan growth of 10.2% in 2014, incorporating a moderation in household loan growth to 9.9% and non-household loan growth of 10.6%”.

This is backed by the fact that these regulations are visibly aimed at cracking down on NBFIs rather than the main banking industry as a priority in reducing household debt and ensuring that consumers at least attempt to live within their means.

“Lowering the maximum loan tenure from 45 years to 35 years will not result in a significant hike in monthly instalment, we believe that the shorter maximum tenure will not dampen the growth momentum of property loan,” Cheah King Yoong of Alliance Research pointed out in his report.

Personal loans are also seen as less than threatening to banks, as it makes up less than 5.5% of the individual bank’s lending portfolio. In general, Cheah said that banking groups are already in compliance with the responsible lending guidelines.

“We do not foresee that implementation of these new macro prudential policies to have a significant impact on the overall banking sector and banking groups under our coverage, but these measures could have a more severe impact on the NBFIs.”

In fact, Chen noted that the measures are expected to be a credit positive for Malaysia’s three largest banks by total assets: Maybank, Public Bank and CIMB Bank. “With their dominant branch networks, these banks will continue to have scale advantages that will help them price loans more competitively than smaller banks,” he said.

Shorter loan tenures is also expected to improve the quality of bank borrowers.

The rise of NBFIs

The main concern when it comes to NBFIs are the number of personal loans that it takes on – it has become the largest provider of personal financing, surpassing the banking institutions with 58% of market share.

As a contrast, about 80% of NBFI lending transactions are personal financing, compared to the banking system where it only makes up 5%.

NBFI growth has gone up compared to last year, with the three largest NBFIs, Bank Rakyat, Bank Simpanan Nasional and MBSB, expanding at a rate of 23.1% compared to 2011’s 17.1%.

They have also seen increased growth in new personal financing facilities, up 63.7% from 2011 at RM 43 billion, and a substantial increase over the new personal financing facilities of banks that fell by 6.2% to RM 19.4 billion.

KiniBiz has previously highlighted the role of NBFIs in the increased lending to households.

Cheah reported that Bank Rakyat accounted for 59% of NBFIs market share in personal financing, while MBSB and Bank Simpanan Nasional followed with 26% and 13% respectively.

BNM has had no regulatory powers over NBFIs until recently, and the lending practices of NBFIs until now has been allegedly more than a little irresponsible.

This is unsurprising, as NBFIs have been described as ‘aggressive’ in their lending practices.

The regulations targeting NBFIs are for the sake of the borrowers than out of any concern for the systemic integrity of the lenders.

This is primarily due to the fact that the lenders are more or less protected by the automatic salary deduction function carried out by Angkatan Koperasi Kebangsaan Malaysia (Angkasa) for civil servants.

NBFIs will definitely have to smarten up their processes if they want to survive the new regulations. After being absorbed under the Financial Security Act 2013, NBFIs are directly under the eye of BNM.

Prior to this, NBFIs did not dance to the same tune as the banks, which resulted in such possibilities as civil servants with a monthly pay of RM700 obtaining a loan for RM200,000 with a tenure of 20 years.

This was further seen when credit cooperatives in Johor bemoaned the new regulations, stating that before this the 60% maximum loan to income value ratio for civil servants did not take into account non-government housing loans and vehicle loans – but now they would be forced to calculate that in, disqualifying a significant amount of potential borrowers.

But whether or not this is common practice is questionable. In January 2012 BNM introduced a set of financial guidelines for banking systems that included a debt service ratio that was capped at 60% for civil servants and had to be calculated after tax and EPF statutory deductions, and considering all debt obligations.

This would have had little impact on NBFIs had not the Cooperatives Commission also been expected to impose similar requirements on co-operative banks. Analysts are split on the pervasiveness of obedience when it comes to these guidelines among NBFIs.

Unlike the banking sector that was little affected by the cap on housing loans despite its heavy reliance, NBFIs have not been so prudent when exercising the limits of their loan extensions to those who may not have qualified, or perhaps should not have qualified, had not the loan stretched to 25 years.

The tighter credit requirements now increase the qualifying criteria for borrowers to secure new financing, particularly those with outstanding debt obligations and little cushion in their debt-servicing capacities, as well as new borrowers with weak credit profiles, the Moody report said.

“The risk lies with the fact that the bulk of the loans are to borrowers earning less than RM 3,000 a month. For instance, MBSB’s minimum salary requirement is RM 700 a month, while Bank Rakyat’s is RM 1,000 a month,” Desmond Ch’ng of Maybank KE stated in his report. It also said that these loans are extended almost exclusively to civil service and government-linked company employees.

But one can also point out that the very fact that a large portion of their consumer base are civil servants is what buoys the system. Government employment is considered far more stable than private, with much less risk of unemployment or salary reduction – add in automatic deduction to the risk and you have a failsafe lending audience.

Anthony Dass, chief economist of AmBank Group conceded in a reply to KiniBiz that the size of NBFIs’ personal loan exposure is a cause for concern with regard to the entire banking system, but with the automatic salary deductions via Angkasa from the civil servants salary as opposed to the normal bank loans where the risk of default is high due to the absences of such automatic salary deduction, there is hardly much risk to the lenders.

While bankruptcy has yet to be a common affliction among civil servants who borrow from NBFIs, economists agree that if the high rate of loan approval among NBFIs coupled with their less than stringent lending practices went on, it might become an issue.

It may not be all gloom and doom for NBFIs, however. The new regulations would benefit them in the long run, especially in terms of ensuring a certain quality of borrowers – specifically those with better loan to income ratio value.

Two faces of the same coin

For Yeah Kim Leng, chief economist at RAM Holdings, and several other economists and analysts, the new regulations representing a clampdown on NBFIs is welcome news.

On one hand, it ensures that the NBFIs will now have to adhere to the guidelines set out by BNM or face its wrath now that they are under its purview.

“There will be no more discretionary lendings,” Yeah points out. “This will also be good for the cooperatives, as the new regulations will benefit them in the long run by lowering their risky lending practices.” This is expected to ensure a better quality of borrowers, with a better loan to income ratio value.

It would also help to protect the borrowers. Concerning the maximum debt service ratio of 60%, Yeah felt that it would not be uncommon for civil servants to be leveraged to that point, due to the availability of easy credit and low interest rates offered by NBFIs.

“It doesn’t leave much for saving at the end of the month, as most of the salary would have gone for repaying debt,” Yeah noted. “It’s quite likely that the borrowers will have hardly any savings, and they would likely be open to all kinds of risk.”

This is especially so for the lower-income groups as they are the most affected by the rising costs of living, leading them to maximise on their borrowings to catch up.

Dass agrees with that, but paints a flipside to BNM’s urge for people to live within their means, especially in terms of the civil servants: “With living costs going up, how are these people to live within their means?”

He points out the slow increments and the lower pay faced by those in the government sector results in them lagging behind in terms of economy. Removing the accessibility to these loans, he says, will affect the disposable income and quality of living for the civil servants.

He argued that the current process practiced by NBFIs are in fact practical.

“Your required three months payslip will show if you have a government car loan, government house loan and so on, so the lenders will be aware of these obligations.  They take into consideration the debts that are visible on the payslip. They calculate what your balance disposable income is. The loans are not simply given out because one is a civil servant.”

Previously, if a borrower could get a loan for 15 years, instead now he will have to take a loan for ten years while having to pay a higher monthly amount for the same amount of loan. The alternative to that is taking a smaller amount to reduce monthly payments. His disposable income in the form of loan disbursements will be cut down and he is deemed poorer.

This of course brings up the issue of wealth inequality in the country, and the plight of the civil servants.

As Dass plainly stated, If you’re a civil servant you can maybe get a housing loan for RM 300 000 for your pay. What sort of house can you get in Putrajaya aside from a flat, if you are lucky? “So they are a bit marginalised. From the start, they are looked down on.

People always say that they’re inefficient and crappy and other negative things. And on top of that they do not get paid well.”

The future for NBFIs?

Bank Negara Malaysia recently signed an MoU with the Cooperative Commission of Malaysia, where co-operative organisations will have to get approval from BNM before collecting deposits from the public, outside of its own members.

This step is supposed to ensure that co-operatives are financially sound before they collect deposits from the public, protecting both the public and the organisations.

NBFIs have been less than cautious with their loan approval, and they will now have to face the consequences with the implementation of the new regulations. While loans prior to the announcement are considered ‘safe’, NBFIs will be facing a challenge to draw in new borrowers.

Yesterday: Maxing out on personal finance