AS we navigate one of our worst crises in history, it is timely for the government to review some of our age-old banking practices that hardly augur well for a competitive economy.
Among those that need to be reviewed and addressed are:
i) Legal documentation: The cost of legal documentation for bank loans is exorbitant and a bane to businesses. The cost in countries like Singapore and Britain is a fraction of our fees. In fact, in countries like the Philippines, banks do not even engage solicitors for mortgages. What is the reason for a scale of legal fees based on the size of the loan when all of the legal documents are standard formats provided by the banks to solicitors? Moreover, borrowers have no leverage whatsoever to negotiate or change any of the provisos in these standard loan documents. It is time for banks to have in-house legal units to handle the loan documentation, at least for individual mortgages and business loans to SMEs.
ii) High Forex rates: Compared to financial centres such as in Singapore and Hong Kong, our banks earn a fat margin above spot rates on Forex transactions. The spread between buy and sell rates is just too wide for comfort, and even some of the smaller fintechs are now able to offer better remittance rates.
iii) High lending rate: Though Bank Negara Malaysia has instituted multiple reductions in the Overnight Policy Rate over the recent months, borrowing rates for SMEs remain exorbitantly high. While the banks do reduce their base rates with policy rate reductions, the effective lending rates remain disproportionately high as loans continue to be pegged at substantive margins over and above cost of funds.
iv) Prepayment penalty: The condition of prepayment penalties on borrowers first began in the mortgage segment where the penalty was to be compensatory for the bank absorbing legal and valuation fees. Banks generally do not absorb legal and valuation fees now, and the prepayment penalty has morphed into a standard condition for most loans. The penalty is hefty at about 3% of the loan sum and is, in a way, intended to encumber a borrower to a bank for a long time. Because of the penalty, borrowers are in no position to do a switchover to an alternative bank that is able to offer a lower rate pricing. Bank Negara can look at the Canadian experience for seamless switchover to alternative lenders offering cheaper rates.
v) Aggressive recovery actions: Despite promises made in public by banks, the reality is far different. Banks act aggressively on distressed borrowers, slapping them with punitive conditions, high pricing of loans and penalty charges. Restructuring of distressed loans is hardly in a manner that augurs well for quick recovery. Unless and until the government steps in with a genuine assistance plan for distressed business, we’ll see closures and rising unemployment in the country.
Interest expense is a major constituent in the operating cost structure of businesses, and unless they are able to avail reasonable interest-pricing for their borrowings, many of them will be crushed by the weight of their debt.
iv) High remuneration: The trend of banking executives enjoying excessive salaries and bonuses is in stark divergence from the reality on the ground.
Banking is a licensed industry and the consequent barrier to entry confers a wide monopolistic advantage that has somewhat been abused to the detriment of borrowers.
It is critical now for the government to call upon Bank Negara to study and review practices in the industry so that the interests of borrowers can be fairly served.
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