Diversify your funding sources, says central bank

CORPORATIONS involved in building large scale renewable energy projects ought to diversify their funding sources to include capital market instruments, foreign direct investments and alternative financing structures, says Bank Negara Malaysia (BNM).

“It is important to note that the banking system alone cannot and should not be expected to meet all financing needs, particularly for large-scale, capital-intensive, long gestation energy transition projects,” the central bank tells StarBiz 7 in email responses on the issue of the single customer risks.

BNM adds that such funding diversification “supports an orderly and credible energy transition, while maintaining prudent risk distribution across the financial system”.

It also explains that the single counterparty exposure limit (SCEL) serves to ensure that banks are not overly-exposed to any individual counterparty.

“Experience has shown that even well-capitalised banks can face distress or failure where losses are highly concentrated.”

The SCEL is also to safeguard financial system stability by managing contagion risks.

“Large and interconnected exposures have the potential to transmit stress rapidly across institutions and markets.

“The SCEL helps mitigate potential domino effects between banks and large corporations, particularly during periods of heightened uncertainty.”

Although the SCEL was introduced in 1986, BNM has revised it from time-to-time to reflect current developments in the financial system, with the most recent review in 2024.

That was when an additional 10% limit expsoure was allowed for selected counterparties within the domestic energy sector, effective January 2025.

“This enhancement provides additional flexibility to accommodate the unique structure of Malaysia’s energy sector, while supporting the implementation of the National Energy Transition Roadmap.

It facilitates a smooth and orderly transition towards net zero by 2050, while safeguarding the country’s energy security.

“This measure enables banks to play a catalytic role in supporting national priorities, while preserving the integrity of SCEL as a prudential backstop.

“In providing for this flexibility, BNM has carefully considered Malaysia’s economic structure and financial system, as well as feedback from a range of stakeholders.”

The central bank says it will closely monitor the continued appropriateness of the additional limit.

“While the flexibility provides additional headroom for the banking system to support energy transition initiatives, the banking system alone cannot and should not be expected to meet all financing needs,” it adds. — By GURMEET KAUR