Best to leave banks alone

I refer to the FMT report quoting Finance Minister Lim Guan Eng as directing commercial banks to grant greater loan access to first-time house buyers and SMEs recently.

I am a retired banker who was in the industry for 33 years. First of all, I believe the minister meant well in wanting to inject more liquidity into the market to jump-start the economy. In fact, Lim has been prodding the banks to ease lending for some time now, and his latest directive was his strongest plea yet.

As a free market economy, banks are profit-driven. When there’s money to be made, banks will jump at the opportunity. Likewise, when a business proposition has potential risks such as the possibility of default, banks will exercise extra prudence.

Banks also need to make profits in order to be sustainable so that they can support the economy and the well-being of over 160,000 Malaysians employed in the banking sector.

Lim’s directive to banks is therefore an attempt to tamper with the self-correcting mechanism, or the so-called “Adam Smith’s Invisible Hand” that underpins free market economies. Going down this road comes with inherent medium- to long-term risks.

Take the property market. A large part of the imbalance is due to the mismatch between housing prices and affordability. The median household income has experienced a slower increase relative to median property prices. According to Bank Negara Malaysia (BNM) reports, the median property price is five times higher than the median household income.

The last thing banks want is for a borrower to default on payments. Providing financing to borrowers who cannot repay the instalments reeks of financial recklessness, or worse, criminal negligence. This undermines financial stability and could bring about downgrading by rating agencies as well as erosion of investors’ confidence in the long run.

As of end 2018, BNM data showed an overhang of 35,000 residential units worth RM30 billion. If we include the unsold, under-construction properties, there’d be 169,000 units valued at RM93 billion. On top of that, our household debt to GDP ratio, which stood at 83% last year, remains at alarming heights by global standards. These are not exactly sterling statistics on the country’s economic health.

As for the SME segment, it is untrue that many businesses have problems securing loans. According to BNM statistics, the loan approval rate for last year was 94%, with 89% of applications approved within one month. Artificially pushing those figures any higher could subject banks to being taken advantage of by unscrupulous borrowers who do not generate any value to the economy.

While I believe Lim has good intentions in asking banks to go easy on lending, this must be tampered with prudence and sound judgment. The subprime crisis that hit the US between 2007 and 2009 should serve as a lesson to us. We can ill afford to face this crisis, with the current economic headwinds.

Johnny Tsen is an FMT reader.

The views expressed are those of the author and do not necessarily reflect those of FMT.