Don’t bend lending rules for power boom

THE call by a banker to lift single-customer limits for banks’ exposure to the energy sector is an interesting proposition.

It comes at a time when Malaysia is experiencing a boom in data centres and the ensuing power plant expansions.

New power plant projects are being aggressively awarded, while older ones are granted extensions, mainly to feed the voracious energy appetite of these data centres.

As a result, a lot of funding is required. This is where the single-customer limit issue comes into play.

This week, a local banker speaking at an energy-related conference in Kuala Lumpur, posited that banks are constrained by the single-customer limit, which caps lending to a single party at 25% of a bank’s equity.

The argument is that such limits could restrict financing for large-scale energy projects and that the country would run out of headroom to fund its energy transition.

However, single-customer limits are imposed by banking regulators worldwide as prudential safeguards to prevent excessive concentration risk.

Such measures are not to be trifled with just because of a new investment trend.

Rightly applied, the single-customer limit means that if an energy project run by a private enterprise has the national utility as its offtaker, the bank’s current exposure to that utility should be included in its assessment of whether it can finance the project. This is because the rule is all about controlling concentration risks.

Furthermore, when applied to the current data centre boom, do note that these businesses also have their fair share of risks.

What happens if newer, more powerful artificial intelligence (AI) chips make Malaysian data centres less competitive? Or if AI evolves to a point where fewer data centres are needed?

In addition, such projects can be financed through the bond market, which is fairly vibrant in Malaysia.

Why allow banks to adopt risky behaviour considering their stability is at the crux of the country’s economic stability?