Lending support


Report: Banks play key role in sustaining recovery

PETALING JAYA: Bank Negara has warned that Malaysia’s economic recovery could take a hit, if a pullback in bank lending becomes more pervasive due to heightened concerns over banks’ asset quality.

In its Financial Stability Review (FSR) for the first half of 2021 (H1’2021), the central bank revealed that since the onset of the Covid-19 pandemic, the average value of new working capital loans extended by banks has dropped by about half compared with pre-pandemic levels.

This is amid the higher provisions for credit losses undertaken by banks in H1’2021, in anticipation of a deterioration in asset quality as repayment assistance programmes are gradually unwound.

Provisions are about 54% higher than the pre-pandemic level and have risen further to 1.8% as a share of total loans as at end-June 2021.

In comparison, the five-year average was 1.3%.

Despite the banking sector’s cautious risk appetite, Bank Negara said banks have continued to support financing to viable small and medium enterprises (SMEs).

During the first half of 2021, more than a quarter of approved SME loans went to first-time borrowers, while approved loans to new SMEs accounted for almost 20% of the total volume of SME loans approved.

Bank Negara's in its Financial Stability Review (FSR) for the first half of 2021 (H1’2021), revealed that since the onset of the Covid-19 pandemic, the average value of new working capital loans extended by banks has dropped by about half compared with pre-pandemic levels.Bank Negara's in its Financial Stability Review (FSR) for the first half of 2021 (H1’2021), revealed that since the onset of the Covid-19 pandemic, the average value of new working capital loans extended by banks has dropped by about half compared with pre-pandemic levels.

This has helped to sustain business activity, particularly as businesses seek to pivot their operations or pursue new business opportunities in response to the immediate and foreseeable longer-term impacts of the pandemic.

“Overall outstanding SME loans grew by 6% (December 2020: 9.6%), with approval rates for SME loans improving to 77.3% (December 2020: 73.3%, five-year average: 82.8%).

“Financing for investment-related activities, which will expand the productive capacity of SMEs, continued to grow albeit at a more moderate pace (June 2021: 2.4%, December 2020: 7.6%).

“Meanwhile, financing for working capital increased by 9.2% (December 2020: 12.3%), driven primarily by the consumer-facing sectors such as wholesale and retail, hotels and restaurants, and transportation sectors which continued to face headwinds in the challenging environment,” according to the central bank.

The FSR report pointed out that one in five SME loans or 21.6% underwent repayment assistance, up from just 7.3% in September 2020.

Looking ahead, as the economic recovery gains traction, Bank Negara said the ability of more businesses to resume servicing their debt would further improve the risk appetite for new bank lending, especially to SMEs.

Meanwhile, Bank Negara said the bank lending for households has held steady, particularly for secured loans, amid a more cautious outlook on credit risk.

It is worth noting that the loans for households grew by 5.2% year-on-year for the first six months of the year.

About 70% of new banking system disbursements in the first half of 2021 continued to be channelled to middle- and high-income borrowers who have greater capacity to take on new debt, with 40% and 20% of total new disbursements going towards the purchase of residential properties and cars, respectively.

“Importantly, lending continued to be underpinned by sound underwriting standards, with the debt service ratios of newly-approved and outstanding household loans maintained at a prudent level of 41% and 35% (December 2020: 43% and 35%), respectively.

“Overall household debt-to-gross domestic product ratio improved to 89.6% but remained elevated amid the sluggish recovery in nominal gross domestic product,” it said.

Bank Negara added that most household borrowers were reasonably resilient, with policy support measures providing additional buffers for households facing higher levels of financial stress.

According to the FSR, about 12.8% of household loan accounts were under repayment assistance.

“Simulations suggest 11% to 15% of household borrowers may need to draw down on financial buffers to service debt.

“Of which, only 1.9% are at risk of depleting their cash or deposit buffers,” it said.

Looking ahead, while the country’s recovery prospects remain subject to the uncertainty surrounding the pandemic, Bank Negara is positive that the domestic financial system is expected to remain resilient against potential economic and financial shocks.

“Banks, insurers and takaful operators continue to have sufficient financial buffers to absorb potential losses under severe macroeconomic and financial conditions, while sustaining support for economic recovery.

“Business sector performance began to recover heading into the second quarter of 2021 amid the easing of movement restrictions.

“The share of firms-at-risk has declined from earlier peaks seen in 2020, although it remains higher than the average pre-pandemic levels due to continued challenges faced by firms in sectors that have been harder hit by movement restrictions,” it said.

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