May the light guide us to good financial management
By M. Saraswathi
KUALA LUMPUR,. The almost endless calls for a blanket moratorium on loans in Malaysia bring back grim memories of the past, especially the failure of Britain’s Northern Rock Bank during the global financial crisis 13 years ago.
While there could be different reasons on what led to NRB’s failure — the most fundamental flaw was that it faced cash flow and liquidity issues despite making buckets of profit prior to its downfall.
There was simply not enough inflow of funds to support the outflow. So it ultimately collapsed, the first British bank do so in 150 years as a result of a bank run.
Similarly, another round of blanket moratorium in the local context would mean that banks are expected to run their day-to-day operations smoothly without an inflow of funds. Seriously, is that tenable?
There would only be outflows as depositors, affected by the COVID-19 pandemic, whether due to reduced incomes or job losses, would draw down their savings.
The safety buffers that banks have built over the years during good times would eventually be depleted as seen during previous crisis. This would also raise the banks’ risk aversion just like how ordinary people become more cautious in their spending when their savings dwindle.
Bank Negara Malaysia (BNM) revealed in its recent report that the local banks’ credit cost could rise to RM29 billion in 2020 and 2021 on the back of higher projected loan impairments.
In anticipation of higher credit losses, banks have been shoring up their buffers by adding RM2.7 billion to potential loss provisions during the first half of 2020.
Yes, another round of blanket moratorium may stimulate the economy but then at what cost to the country?
No matter what, borrowers remain responsible for their loans. But history has shown that over exuberance for property and personal loans had often dragged down economies, not only in Malaysia but also globally.
Malaysia’s household debt is one of the highest in the world at 90 per cent compared with more advanced economies. Germany has its household debt level at 55 per cent, the United States, which is a consumer-driven economy at 85 per cent, Hong Kong 82.7 per cent, and Singapore 65 per cent.
Do we want to have a debt-driven growth model for Malaysia?
The vigorous argument is that the cost on banks may be a mere RM6.5 billion if there is another moratorium. But then it also chokes off RM18.3 billion in terms of an inflow of funds from loan repayments and that would eventually adversely impact on cash flows.
Such a situation does not augur well for the Malaysian economy, which is edging towards a recovery path after an unprecedented setback brought about by the health pandemic.
Banks need to be able to lend to viable businesses as that would create jobs and fuel the economy to remain on the growth trajectory.
Those who are conveniently calling for a blanket moratorium must not forget that the banking and financial industry is intertwined with both employees and retirees.
Do remember that banks are ultimately borrowing from depositors.
And shareholders of banks are superannuation funds such as the Employees Provident Fund (EPF), Retirement Fund Inc (KWAP), Tabung Haji, Armed Forces Fund Board (LTAT), Permodalan Nasional Bhd (PNB) and the like.
Put it simply, it is also our money in the form of deposits and our money in the form of shareholdings in the banks through all these funds.
So, when the buffers thin out and loan demand weakens, banks would not be able to declare dividends as they will then rely on retaining their earnings to strengthen their capital.
And when banks don’t declare dividends, it is not only the Top 20 per cent (T20) of our population who will be affected but Malaysians in general through less or no benefits from their deposits held in unit trust funds or in bank deposits.
Besides, one can also argue that the economic disparity would even widen with a blanket moratorium as the easing tends to benefit other groups differently, like some who have even used the extra money from the moratorium to invest in the stock market!
So, it appears that the higher income group will benefit more than the lower-income masses.
Hence, the right approach to this is having targeted repayment assistance, where only those who really need help would be given some leeway, whether in the form of a moratorium, reduced repayment or a restructured loan.
The battle with the virus is not over yet. It is going to be a marathon — the third wave of COVID-19 hit us just as we thought we were a step closer to claiming victory. We can’t exhaust all our energy (and funds) and fail to make it to the finishing line.
A sound financial system that can play a counter cyclical role to support the transformation of the economy, regardless of where we are in the economic cycle, is Malaysia’s greatest asset. That is something precious that we would not want to jeopardise.
We need the light to not only guide us to the end of the tunnel, but above and beyond.