Tougher Lending Rules Positive For Banking Sector Health
BMI View: The recent move by Bank Negara Malaysia (BNM) to impose tougher lending restrictions is an endorsement of our long-held view that policymakers are likely to implement tougher measures to curb speculative activity in the property market and address rising household indebtedness. Although the decision will ultimately hurt profitability going forward, we view the move as a highly positive development for the long-term health of Malaysia's banking sector.
In what we view as a prudent move by Bank Negara Malaysia (BNM) to reinforce existing efforts to address rising household debt and curb speculation in the property market, the central bank introduced a new set of measures aimed at tightening lending rules across the banking sector on July 5. The latest move is an endorsement of our long-held view that policymakers are likely to become increasingly concerned with the unchecked rise in property prices, which has begun to resemble that of a typical asset bubble, and that they would be willing to implement tougher measures if needed to curb speculative activity ( see 'Property Market Looking Precarious', March 2012).
|Source: BMI, Bank Negara Malaysia|
|New Measures Implemented By BNM||Impact On The Banking Sector|
|Maximum tenure of 10 years for financing extended for personal use||Measure is expected to reduce household debt over the medium term and limit bank revenues from short-term credit|
|Maximum tenure of 35 years for financing granted for the purchase of residential and non-residential properties||Mainly aimed at curbing speculation and use of excessive leverage to purchase residential properties, the new rule should help to improve the quality of long-term housing loans. However, housing loans revenue are expected to fall significantly.|
|Prohibition on the offering of pre-approved personal financing products||Credit agencies and banks that rely heavily on providing short-term credit to generate revenue could see a deteriaration in earnings.|
Targeting The Property Market
As the accompanying chart shows, the rapid rise in demand for property-related loans in recent years is becoming a major threat to the stability of the banking system as the composition of the sector's loan portfolio is becoming increasingly less diversified. Looking at the breakdown of the banking sector's loans by sector, we note that the share of loans to households has increased substantially from 47.9% in 2011 to 56.0% in the first five months of 2013. Although capital adequacy ratios for the banking sector indicate that Malaysia's banking system remains fundamentally sound ( see chart), we caution that relying on capital ratios alone could risk underestimating the potential impact of a sharp decline in property prices and widespread default by those borrowers who were only able to invest in property due to lax regulations.
|Rising Household Debt A Growing Concern For BNM|
|Malaysia - Share Of Banking Sector Loans By Sector, %|
According to a statement released by BNM, the new set of rules aims to prevent excessive household indebtedness and to reinforce responsible lending practices by key credit providers. As the accompanying table shows, the new lending rules are heavily focused on limiting the tenure for personal and property-related loans. However, BNM also introduced a prohibition on pre-approved personal financing products, which are becoming an increasingly popular form of short-term financing solutions for Malaysians in recent years. Although innovation in the provision of pre-approved personal financial products have helped to substantially reduce the amount of time and resources required to conduct due diligence on an individual's creditworthiness, we see increasing risks that such innovation could actually result in negligence with regards to risk management. Thus, we view the BNM's decision to strengthen regulation on the issuance of pre-approved loans as a highly positive development for the long-term health of Malaysia's banking system.
|No Cause For Concern|
|Malaysia - Banking System Capital Ratios, %|
Household Debt At Unsustainable Levels
The central bank's recent moves were also accompanied by strong signalling from BNM governor Zeti Akhtar Aziz, who warned that Malaysia's current household debt-to-GDP ratio of 83% is the highest among developing countries in the region. She also argued that given the country's real GDP growth of 4.0-6.0% in recent years, such level of household indebtedness is unsustainable, and thus, require intervention by the central bank.
A Move In The Right Direction
The BNM's decision to implement tougher lending rules should ultimately hurt the banking sector's profitability and negatively impact economic growth going forward. However, over the longer term, we are encouraged by the fact that policymakers are aware of the risks in failing to address unrestrained lending and the short-sightedness of banks. Indeed, the willingness on the part of policymakers to impose tougher restrictions on banks that lend to high-risk individuals, who are less creditworthy for the sake of pursuing short-term profitability, is highly commendable, in our view.