PETALING JAYA: Bank Negara has warned that Malaysia’s economic recovery could suffer if a decline in bank lending becomes more widespread amid heightened concerns over the quality of bank assets.
In its Financial Stability Review (FSR) for the first half of 2021 (S1’2021), the central bank revealed that since the start of the Covid-19 pandemic, the average value of new working capital loans granted by banks has fallen by about half of pre-pandemic levels.
This is part of the increase in provisions for credit losses incurred by banks in the first half of 2021, in anticipation of a deterioration in asset quality with the gradual unwinding of repayment assistance programs.
Provisions are about 54% above the pre-pandemic level and have increased further to reach 1.8% as a percentage of total loans at the end of June 2021.
In comparison, the five-year average was 1.3%.
Despite the banking sector’s cautious appetite for risk, Bank Negara said banks continued to support the financing of viable small and medium-sized enterprises (SMEs).
In the first half of 2021, more than a quarter of approved SME loans went to first-time borrowers, while loans approved to new SMEs accounted for almost 20% of the total volume of approved SME loans.
This has helped support business activity, particularly as companies seek to pivot their operations or seek new business opportunities in response to the immediate and foreseeable long-term impacts of the pandemic.
“The overall SME loan portfolio increased by 6% (December 2020: 9.6%), with SME loan approval rates improving to 77.3% (December 2020: 73.3%, five-year average: 82.8%).
“Funding for investment-related activities, which will increase the production capacity of SMEs, continued to grow but at a more moderate pace (June 2021: 2.4%, December 2020: 7.6%).
“Meanwhile, working capital funding increased 9.2% (December 2020: 12.3%), mainly thanks to consumer oriented sectors such as wholesale and retail, hotels and restaurants and the transport sectors which continued to face headwinds in a difficult environment, ”according to the central bank.
The FSR report highlighted that one in five SME loans, or 21.6%, received repayment assistance, compared to just 7.3% in September 2020.
Looking ahead, as the economic recovery gains traction, Bank Negara said the ability of more companies to resume debt service would further improve risk appetite for new bank loans. , in particular to SMEs.
Meanwhile, Bank Negara said bank lending to households has remained stable, especially for secured loans, amid a more cautious outlook on credit risk.
It should be noted that loans to households increased by 5.2% over one year over the first six months of the year.
About 70% of new disbursements from the banking system in the first half of 2021 continued to flow to middle and high income borrowers who have a greater capacity to take on new debt, with 40% and 20% of total new disbursements being spent on purchasing. residential properties and cars, respectively.
“It is important to note that loans continued to be supported by sound underwriting standards, with the debt service ratios of newly approved and outstanding household loans held at a conservative level of 41% and 35% ( December 2020: 43% and 35%), respectively.
“The overall ratio of household debt to gross domestic product improved to 89.6 percent but remained high amid the slow recovery in nominal gross domestic product,” he said.
Bank Negara added that most borrowing households were reasonably resilient, with policy support measures providing additional buffers to households facing higher levels of financial stress.
According to the FSR, about 12.8% of household loan accounts were subject to repayment assistance.
“The simulations suggest that 11 to 15% of borrowing households may need to tap into financial buffers to service the debt.
“Of which, only 1.9% are at risk of exhausting their cash or deposit reserves,” he said.
Looking ahead, as the country’s recovery prospects remain subject to the uncertainty surrounding the pandemic, Bank Negara believes the national financial system should remain resilient in the face of potential economic and financial shocks.
“Banks, insurers and takaful operators continue to have sufficient financial reserves to absorb potential losses under severe macroeconomic and financial conditions, while supporting economic recovery.
“The performance of the corporate sector has started to recover as we approach the second quarter of 2021 amid easing restrictions on movement.
“The share of companies at risk has declined from earlier peaks seen in 2020, although it remains above pre-pandemic average levels due to persistent challenges facing companies in industries that have been hit hardest. affected by movement restrictions, ”he said. .