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Malaysia’s banks had previously automatically given a six-month blanket moratorium on loan payments to all eligible borrowers from April to September 2020, before moving to a targeted repayment assistance scheme to specifically help only borrowers with reduced income or who became unemployed. — Picture by Firdaus Latif
Malaysia’s banks had previously automatically given a six-month blanket moratorium on loan payments to all eligible borrowers from April to September 2020, before moving to a targeted repayment assistance scheme to specifically help only borrowers with reduced income or who became unemployed. — Picture by Firdaus Latif

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KUALA LUMPUR, Sept 29 — The sharp jump in July of households in Malaysia who took up the banks’ assistance to repay their loans may not necessarily be due to them being in financial distress, Bank Negara Malaysia (BNM) said today.

It suggested that some of these borrowers could be using this opportunity to invest in shares or to build up buffers as a precaution,

Malaysia’s banks had previously automatically given a six-month blanket moratorium on loan payments to all eligible borrowers from April to September 2020, before moving to a targeted repayment assistance scheme to specifically help only borrowers with reduced income or who became unemployed.

Starting from July this year under the Pemulih economic package, banks offered either a six-month loan moratorium or a six-month 50 per cent reduction in monthly loan instalments to all eligible borrowers who apply, but without imposing the requirement for borrowers to have experienced reduced income or lost their jobs.

Today, BNM released its Financial Stability Review for the first half of 2021, where it noted that the percentage of household borrowers who took up loan repayment assistance — either a moratorium on payments or reduced payments — was at 8.9 per cent at the end of December 2020, 11.5 per cent in February 2021, 10.6 per cent in May 2021, and 12.8 per cent by the end of June 2021. June was also when Malaysia went under a total lockdown, otherwise referred to by some as a full movement control order (FMCO).

But by the end of July 2021, household borrowers who took up loan repayment assistance had risen sharply to 25.4 per cent of all household borrowers, BNM noted.

Similarly, the percentage of banks’ exposure to outstanding household loans that came under repayment assistance rose sharply from 16 per cent at the end of June 2021, to 30 per cent at the end of July 2021.

BNM said applications by household borrowers for the latest loan moratorium had peaked in the first half of July while there were steep declines in the weekly applications for the moratorium.

BNM said borrowers who opted in or applied for the latest loan repayment assistance were spread out across all income groups, with BNM’s July 2021 figures showing 30 per cent earning below RM3,000 monthly, 31 per cent earning between RM3,000 to RM5,000, 30 per cent earning between RM5,000 to RM10,000 per month, and nine per cent earning more than RM10,000 per month.

Commenting on the varying income of borrowers that had sought help with repaying loans, BNM said: “This, coupled with the more flexible eligibility criteria for assistance, suggests that the recent rise in accounts under repayment assistance is not solely driven by borrowers in distress.”

Previously, the banks only automatically approved loan repayment assistance to borrowers with lower income or those facing economic hardship, BNM noted.

Citing its Consumer Sentiment Surveys from December 2020 to May 2021, BNM said that some of the borrowers were using the financial space given for purposes such as investing in the stock market.

“Recent surveys by the Bank and anecdotal evidence indicate that about a third of borrowers that applied for repayment assistance are partly using it to build up precautionary buffers, and to a lesser extent, for investments in the equity market.

“These borrowers are expected to have less difficulty in resuming their repayments when the current repayment assistance ends,” it said.

BNM said the percentage of household borrowers who are in temporary financial distress and under a repayment assistance plan is expected to shrink over time as economic conditions improve, just as was seen during the February to May period this year.

The percentage of household loans from banks that were being used to buy shares remained small at 0.5 per cent of all bank loans and was consistent with the five-year historical average, while stockbroking and fund management firms’ loans also remained stable at less than one per cent of total banking system loans, BNM said. — Picture by Firdaus Latif
The percentage of household loans from banks that were being used to buy shares remained small at 0.5 per cent of all bank loans and was consistent with the five-year historical average, while stockbroking and fund management firms’ loans also remained stable at less than one per cent of total banking system loans, BNM said. — Picture by Firdaus Latif

Higher-income, market-savvy households investing in stocks

Among other things, BNM had in today’s report observed that retail investors accounted for 34 per cent of total value traded in the stock market in August 2021, but said such investments have not been linked with the taking on of higher debts that could increase risks to households under more volatile market conditions.

The percentage of household loans from banks that were being used to buy shares remained small at 0.5 per cent of all bank loans and was consistent with the five-year historical average, while stockbroking and fund management firms’ loans also remained stable at less than one per cent of total banking system loans, BNM said.

BNM said retail investor activity is expected to continue in the near term, as households — especially higher income households — “continue to seek higher returns amid the low interest rate environment”.

“Although there has been evidence of some households using monies from deferred loan repayments to invest in the equity market, this is not prevalent and more likely to occur among higher-income households with greater financial flexibility given the potential costs associated with deferring loan repayments.

“Market insights also suggest that these retail investors tend to be those with some experience in equity investments, seeking to increase longer-term returns on their savings,” it said.

All these factors would continue to limit any risks that would be posed to financial stability from higher levels of retail investor activity in recent times, BNM said.

However, BNM noted that a prolonged period of low interest rates could increase risks, as households that may be less capable of managing investment risks may be driven to search for investments with higher yields.

As a whole, BNM noted that the country’s banks are resilient, which means the banks are able to continue to support both financial stability and the economic recovery in Malaysia.

Beyond being able to provide loan repayment assistance to affected households and businesses, the banks’ resilience has also enabled them to continue lending.

For household borrowers that are mostly reasonably resilient and are cushioned from potential shocks by existing financial buffers and policy assistance measures, BNM also said: “Repayment assistance extended by banks continued to provide support to distressed household borrowers, staving off further damage to their finances and, in turn, the economy and financial system at large.

“While this is helping to temporarily support borrowers’ debt-servicing capacity, a more entrenched economic recovery remains key to restoring the longer-term financial health of borrowers,” it said of household borrowers.

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