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apple developer:Tell-tale signs from banks’ rising provisions

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Banks are already being coerced by Bank Negara to be “extra accommodative”. Under Bank Negara’s watch, banks are already being cautious in collecting amounts due. Elk-Desa Resources Bhd is one of the largest second-tier financing companies. It mainly offers loans to second-hand car dealers while a small portion of its assets is tied to people wanting to buy furniture on credit. Its customers are mainly people from the bottom 40 category who do not qualify for loans from the tier-1 financial institutions which are commercial banks. In the latest quarterly results, ELK-Desa stated that it would stop giving out loans in these two segments for the next 12 months, as the amount it has set aside for bad loans has gone up by 83% to RM16.64mil, causing its profit to decline by 36% to RM16.09mil. Note that ELK-Desa is still profitable and continues to record higher revenue. But it has decided to stop giving out loans because of the rising provisioning. That is the reality of the high world of finance. When loans are not serviced, they have to start providing for it even though there may be recoveries after a year or two. When provisions start to rise, the risk profile rises as well, causing them to pull back on their loans. The situation is similar for banks. Just because banks are profitable, it does not mean that the financial institutions can afford to offer another round of blanket moratorium on loan repayments for another three months or so. Politicians – especially the likes of former Prime Minister Datuk Seri Najib Razak and former Finance Minister Lim Guan Eng – are pressing the Perikatan Nasional government to coerce banks to offer another round of moratorium on loans. They contend that it would help support the economy from the third wave of the Covid-19 pandemic. Without a doubt, a moratorium on loan repayments will help those impacted by the Covid-19 pandemic. Small businesses, retail outlets, hotels and tourism-related entities need any help they can get. The businesses are already getting some form of assistance, ranging from wage subsidies to tax deferrals and a law that prevents financial institutions from taking action. The Temporary Measures for Reducing the Impact of Covid-19 Act is in force until December this year. Hence until December, activities such as repossession of vehicles or eviction due to the inability to pay rent can be challenged. Banks have also offered to help. The rule of thumb is businesses affected by the Covid-19 pandemic can negotiate with the banks on the repayment schedule or deferral on the repayment of loans. Banks are already being coerced by Bank Negara to be “extra accommodative”. Under Bank Negara’s watch, banks are already being cautious in collecting amounts due. Another round of moratorium is not necessary. Why would businesses even come to the negotiating table to discuss the various repayment options with the banks if an automatic moratorium is put in place? Moreover, an automatic moratorium paves the way for even healthy businesses to not service their loans at the expense of the earnings of the banks. If companies are accorded an automatic moratorium, the same would also be required to be extended to individuals – irrespective of whether their income has been affected by the pandemic or not. Even civil servants and private-sector employees whose income has not been affected despite the slowdown would be enjoying benefits that should rightly be accorded to only those really suffering from the pandemic. Banks bear the brunt of any moratorium on the repayment of loans and it will be harmful to the economy. Despite remaining profitable, banks are providing more for impairments on loans. The top four banks in the country – Malayan Banking Bhd (Maybank), Public Bank Bhd, CIMB Group Holdings Bhd and RHB Bank Bhd – have all set aside more for bad loans in the first nine months of this year. Maybank’s provisioning for impairments has gone up by 79.3% to RM3.5bil in the first nine months of this year compared to last year. CIMB has set aside more than RM3.9bil for the last nine months, an increase of almost 280%, while Public Bank’s impairment cost has gone up by almost four fold to RM549.7mil. RHB Bank, which has the Employees Provident Fund (EPF) as its anchor shareholder, has set aside RM540.67mil in provisions so far this year compared to RM238.82mil in the first nine last year. All financial institutions have signalled an increased risk profile of loans in the coming months due to an increase in insolvencies and job losses. Hence, banks will set aside more for doubtful debts in the months to come. Politicians contend that banks are profitable and hence should be able to accord a further three months or more of moratorium. They say that putting more money in the hands of the people will spur spending and boost the domestic economy. But banks have to be profitable to continue to give out loans. If banks are not profitable, the wider economy will be impacted. The objective of any moratorium is only to help those genuinely affected by the Covid-19 pandemic. It should not be done with the view of putting more money in the hands of the people with the view of prompting them to spend. Why spend money that is not really yours to begin with? It’s a culture that is not healthy but popular and capitalised on by politicians. The “cash is king” culture that partly led to the creation of the failed 1Malaysia Development Bhd (1MDB) is dangerous. It gives a false sense of security and postpones difficult decisions that should be made in order for the economy to recover. Post-Covid-19, not all businesses will recover as fast as many think. For instance, people are used to buying things online, causing uncertainty to retail sales. The work from home culture is set to stay, impacting demand for office space. Pubs and restaurants that survive the pandemic will pick up fast, but many newcomers will come into the scene, intensifying competition. Air travel and cruise businesses will take some time to recover. Only those who really want to go on a cruise will set foot on a ship, knowing very well that it only takes one passenger to get infected before they are all quarantined for months. An automatic moratorium delays difficult decisions. It is only a populist move to help gain popularity. M Shanmugam is the former specialist editor of The Star. Views expressed here are his own.
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