Impaired Loans on an Uptrend?

Malaysia’s impaired loans have been creeping up every month in the fourth quarter of 2020 after the blanket loan moratorium ended on Sept 30. This was reported by The Edge Markets on 5 February 2021.

The amount of non-performing loans (NPLs) reached a nine-year high of RM28.7 billion at end-2020, according to the latest data from Bank Negara Malaysia (BNM). From RM24.9 billion in September, total impaired loans rose to RM25.7 billion in October and subsequently to RM27.8 billion and RM28.7 billion in November and December respectively. The last time impaired loans reached this level was in 2011.

The percentage ratio of net impaired loans to net total loans also rose in tandem during the period. From 0.84% in September, the ratio climbed to 0.87% in October, 0.95% in November and 0.99% in December.

Gross impaired loans ratio continued to inch upwards to 1.6% in December from 1.5% in November, returning to levels comparable to 2019, BNM noted in its monthly highlights report.

 

Image: https://www.thestar.com.my

The breakdown of total impaired loans shows that both the household sector and sector of wholesale & retail trade, and restaurants & hotels saw noticeable upward trends from October to December after the blanket loan moratorium ended in September.

SERC executive director Lee Heng Guie explained that the rising NPLs were due to unemployment and loss of income for households, which have impaired their ability to service loan commitments, especially for those highly indebted individuals.

As for business borrowers, the loss in revenue and shutting down of businesses also contributed to the default of loan repayment. “Some have restructured their loan commitment, but the multiple loans commitment compelled the borrowers to reprioritize their debt service payments,” said Lee.

Even as the blanket moratorium ended and most borrowers resumed loan repayments, a target repayment assistance was offered to selected groups of people until June 30, 2021. Nevertheless, the moratorium in general delayed the recognition of impairments by banks and therefore the high impaired loans reported subsequently are possibly due to the lag.

UOB Malaysia economist Julia Goh acknowledged that NPLs have inched higher since loan repayments started in October last year. “I believe that uncertainty with regards to the economic recovery and tightening of containment measures as well as Movement Control Order (MCO) are also the added factors, particularly for the tourism-related, retail and recreational sectors,” said Lee.

As it is, BNM had earlier cautioned in its Financial Stability Review that overall impairments could rise to above 4% of loans by the end of 2021, mainly driven by the business segment, as a result of economic and financial shocks from the Covid-19 pandemic. BNM said this based on a conducted macro stress test which considered effects of the blanket moratorium implemented in April last year and subsequent targeted repayment assistance for individuals announced by banks in August.

Rising impaired loans may seem to paint a bleak picture of the economic recovery, however banks should be able to withstand the present shocks. The level of capitalisation and liquidity are more than the minimum prescribed level, according to Mohd Afzanizam Abdul Rashid, chief economist at Bank Islam Malaysia Bhd.

Still, a slower pace of recovery and ongoing labour market challenges could likely put more pressure on loan impairments, UOB’s Goh pointed out. BNM said banks continued to set aside additional provisions as a precaution against future credit losses with the total provisions to total loans ratio increasing to 1.7% in December from 1.6% in November.

Maybank’s economics team does not foresee any more rate cuts into 2021. ROEs are expected to improve to 8.6% in 2021 but will be below the average of over 10% in 2019.

Overall, caution is the word, which leaves domestic consumption and private investment rather subdued. Hence, GDP growth for 2021 is at best 5%, rather than 6.5-7.5% as imagined by MOF. Couldn’t BNM devise several strategies to assist those severely impacted? By letting market forces dictate will mean higher bankruptcies, rise in unemployment and more pain than gain. Every major developed economy is doing more to alleviate sufferings, why are we so complacent and laid back? It’s the weather is it?

 

References:

1. Impaired loans creep up to nine-year high, Syahirah Syed Jaafar and Joyce Goh, The Edge Markets, 5 February 2021.

2. Moratoriums pose risks to banking systems in ASEAN, Leong Hung Yee, The Star, 4 February 2021