KUALA LUMPUR: As the country’s economy undergoes its most challenging period yet, commercial banks have a critical role to play in sustaining long-term economic prosperity.
In a statement today, Malaysian Rating Corporation Bhd (MARC) said that given the government’s limited fiscal space, the private sector could play a critical role in ensuring that the Malaysian economy remains intact in the long-term.
“The banks did a great job supporting the Malaysian economy in the periods post the Asian Financial Crisis (AFC) and Global Financial Crisis (GFC); they can surely continue to do so.
“For example, commercial banking institutions can help support the economy by effectively utilising the liquidity made available by Bank Negara Malaysia (BNM), by lending to businesses that need lifelines, like small-medium enterprises with good prospects.
“This is because experience from GFC shows that a slow pick-up in lending growth (in the US) was a key reason behind the sluggish economic recovery despite the massive liquidity injections by its Federal Reserve through its quantitative easing policy,” the statement read.
MARC said with BNM already lowering its Statutory Reserve Requirement (SRR) by a total of 150 basis points in recent times, ample liquidity had been flushed into the banking system.
“These funds are useful for businesses struggling to make ends meet, especially at a time when there is a high cash burn rate (declining revenue and having fixed costs to pay).”
MARC said based on the 2009 recession, loan approvals for businesses in the banking system had fallen on an average of 28 per cent between mid-2008 and mid-2009.
“As such, the economy needs an injection of fresh funds by banks through business lending to recover," according to MARC, noting that the banking sector is in much better shape than it was before the 1998 and 2009 recessions.
It said based on Malaysia’s experience during the AFC, it showed that BNM’s lending growth target of eight per cent imposed on banks to complement the National Economic Recovery Plan (NERP), which was implemented in 1998, had helped the economy recover in the subsequent years.
The setting up of Dana Modal, Dana Harta and the Corporate Debt Restructuring Committee (CDRC) has helped banks to re-capitalise and restructure bad debt so that they could continue lending to businesses.
“This is critical, especially when history shows that even during a shallower recession in 2009, total loan approvals in the banking system fell by an average of 19 per cent between Sept 2008 and May 2009.
“MARC takes comfort from BNM’s disclosure that households are in a position to face the challenges going forward given their financial asset-to-debt ratio of 2.2 times.”
MARC, however, noted that with the likelihood of a spike in the jobless rate this year, household balance sheets could come under pressure as incomes deteriorate and lending from banks decline.
“History testifies to this; amid the GFC, the number of approved loans to households fell by an average of 1.5 per cent in Oct 2008 and May 2009."
Yesterday, BNM in its Annual Report projected that Malaysia’s gross domestic product growth (GDP) is expected to be between -2.0 per cent and 0.5 per cent this year, due to “necessary” global and domestic actions taken to contain the Covid-19 pandemic.
The central bank said the implementation and subsequent extension of the Movement Control Order (MCO) will dampen economic activity following the suspension of operations by non-essential service providers and lower operating capacity of manufacturing firms.