An open letter to banks in Malaysia

 

From FLK

A series of verbal jousting was played out by politicians across the divide over the past month on whether and why banks in Malaysia should extend a loan moratorium to their borrowers.

For more than a decade, our financial systems had been generally calm. And the banks have been building on previous gains earlier – post the 1985–88, 1997 and 2008 crises – gaining the customers trusts in all they do.

The pandemic, now into its second year, is causing growing economic damage to our country. Rather than responding positively to the call by the man on the street and small business enterprises for the banks to extend a loan moratorium, it appears that the bankers view the call as unwarranted with no one willing to step in as intermediaries to help the man on the street.

If the banks were to recall, most of you went through some anxious moments during the 1985-88 and 1997 crises.

Under normal circumstances, the corrective action – just like for any other organisation – should be making financial institutions pay for their actions. Close it down right after it becomes insolvent.

From a moral and ethical standpoint, when things go wrong, it is those who are responsible who should bear the burden of paying for their mistakes and not the public at large.

But for a barrage of government programmes, the financial system in our country was pulled back from collapse. The programmes implemented resulted in profits being privatised while losses are virtually socialised.

If the public were to recall, a combination of the following brought the economic recession to our country during the period from 1985-88:

1. Sharp decline in commodity prices worldwide,
2. Sharp fall in asset prices,
3. A weak export and poor domestic demand led to large financial losses for corporations, which in turn reduced their ability to service their debts,
4. Shortcomings in regulatory and accounting framework for the Deposit-Taking Cooperatives (DTC) sector as well as inadequate supervision of the sector.

The magnitude of the recession affected 24 of the DTCs holding almost 3% of the financial system deposits and four banks, holding almost 4% of the financial system deposits, which were deemed marginally insolvent.

For the four banks, the crisis was resolved with the existing shareholders injecting new capital via a rights issue with any shortfall in meeting the capital adequacy requirements supplemented with proceeds from Bank Negara Malaysia (BNM).

And for the 24 DTCs, 11 with relatively small capital deficiencies received loans at concessional rates and were taken over by an appointed bank, 12 DTCs with moderate to heavy losses were absorbed into one single licensed bank, and one large DTC was taken over by a publicly-listed company and its finance company subsidiary.

The costs to the country reportedly were equivalent to 4.7% of our GNP for this crisis.

The financial crisis in 1997/98 was deemed as the worst economic crisis our country faced before this pandemic.

According to official estimates from BNM, the combined outcome of the economic collapse and property market crash was a massive increase in non-performing loans (NPLs) in the banking system, from about 2% in mid-1997 to nearly 12% in July 1998.

Three major entities were set up during this crisis to help in the recapitalisation and to rescue the failing banks – Danaharta to acquire and manage NPLs from banks, Danamodal to recapitalise those financial institutions whose capital adequacy ratio had fallen below 9%, and CDRC, a joint public and private sector steering committee, to facilitate the restructuring of corporate debts through out-of-court settlements.

Building upon the measures introduced post the 1985-88 and 1997 crises where the regulators tightened its fiscal policies, strengthened its regulatory framework, introduced guidelines on suspension of interests on NPLs and provision of bad and doubtful debts, establishing a central credit bureau to monitor and improve credit information and halted lending to borrowers in default among others, the banking system managed to withstand the next crisis in 2008.

Yes, the banks could have argued that in the crisis in 1985-88 and 1997, it was mainly massive government-sponsored bank lending fuelling the poverty boom that resulted in a buildup of excess liquidity in the economy while simultaneously weakening the bank’s balance sheets.

Be that as it may, the fact remains that in the above two crises, the government, using taxpayers money, bailed out the failing banks.

With no clear end in sight for the pandemic, banks in Malaysia will have to dig deep and ask themselves some tough questions.

To the board of directors in each of the banks in Malaysia, your fiduciary duty does not mean focusing only on returns.

Recent opinions expressed in established and developed markets now view that not considering and failure to integrate broad environmental, social, and governance (ESG) issues is a violation of fiduciary duty. The purpose of your bank is not just to produce profits, but also to produce solutions to problems in the country and in the process to produce profits.

Agreeing to a moratorium and a waiver of late interests by your borrowers would not cause a run on your bank nor would it put it into a near default situation. The banks could still earn a return as your actions are making a positive contribution to society.

In fact, ESG oriented institutional investors nowadays view such actions – creating long-term value for society as a whole – favourably in their investment criteria.

The finance minister in a response to the call for a reinstatement of the blanket moratorium said recently that at least 80% of borrowers do not need it as they have resumed repayments after the moratorium granted last year while banks are already giving or offering targeted assistance to borrowers that really require this relief.

The earlier moratorium ended in the third quarter of 2020. According to the entrepreneur and cooperative development ministry, as at end of the same quarter, more than 30,000 businesses have closed.

This naturally leads to a decline in private consumption and investments due to reduced household spending.

As at end of March 2021, the unemployment rate is at 4.7%.

The costs to bringing this pandemic under control have pushed the country into spending massively. And this spending will be financed through borrowings.

An increase in demand for loans by the government will drive up interest rates. This will have an adverse impact on private investments.

The government is also likely to increase taxes to fund this current spending. And this will further lead to already reduced spending by households on the economy.

There would come a time or it is already happening where everyone will be desperate for cash.

When that time comes, if it hasn’t arrived yet, what good would it be for the banks holding  collateral from the borrowers? There will be no buyers.

The granting of a moratorium to your loan borrowers is just the tip of the iceberg.

Proposing a waiver of the late interests would go a long way in helping and ensuring the circular economy remains turning.

In the crises of the past, the taxpayers, that is the Malaysian public helped in ensuring the banks remains viable.

In this crisis, brought on by unfortunate circumstances and through no fault of anyone in particular, why can’t the banks rise above the politics and economic justifications to help out the same people who have never failed to help you in  times of crisis that have affected your businesses?

The Malaysian public is your life blood. All of us are your customers, one way or another. Unlike past crises, this crisis is so unusual that it affects every Malaysian.

The Malaysian public has contributed to your well being in every crisis you have faced. Now you are not only helping the people who have supported you wholeheartedly in the past but also the overall wellbeing and the future of this country and the generations to come.

FLK is an FMT reader.

The views expressed are those of the writers and do not necessarily reflect those of MMKtT.