KUALA LUMPUR: The local banking and financial sector has experienced one of its toughest years in 2020, but capital and liquidity buffers built over the years have enabled the industry to tackle the challenges from a position of strength, helping the country to cushion the impact of the Covid-19 pandemic. The six-month automatic moratorium and monetary policy measures were among the actions undertaken by the government and Bank Negara. 

There were a lot of uncertainties plaguing the banking sector in terms of the impact of the pandemic on the local economy, said MIDF Amanah Investment Bank Bhd’s senior analyst Imran Yassin Yusof. “Malaysian banks were facing the headwinds from a position of strength, due to the fact that the banks are well-capitalised, hence would be able to weather the crisis and rebound as the economy recovers.” The six-month automatic blanket loan moratorium which came into effect on April 1 and ended on Sept 30,2020, was valued at RM89.6bil as at Sept 11, which benefitted businesses (RM31.4bil) and individuals RM58.2mil. On the other hand, Bank Negara has, since January, reduced the overnight policy rate (OPR) by a cumulative 125 basis from 3% to 1.75%, the lowest level since 2004. 

“These were to help ease the debt service of borrowers and support financing activities, so that the financial system in Malaysia continues to remain orderly. “Such moves were crucial to avoid economic shocks as experienced during the Asian Financial Crisis, which saw a contraction of 7.36% in gross domestic product in 1998, ” said governor Datuk Nor Shamsiah Mohd Yunus. The central bank also announced a reduction in the Statutory Reserve Requirement (SRR) ratio of 100 basis points to 2% in March 2020, as well as additional SRR flexibility given to principal dealers by recognising Malaysian Government Securities and Malaysian Government Investment Issue as part of SRR compliance. 

This move has added liquidity worth about RM30bil to the banking system and is part of Bank Negara’s ongoing efforts to ensure that liquidity is sufficient to support financial intermediation activities. On the back of this scenario, top banks, Malayan Banking Bhd, Public Bank Bhd and CIMB Group Holdings Bhd financial results all posted a drop in their net profit in the second and third quarter of the year. The banks attributed the weaker performance to, among others, lower net interest income, significantly higher allowance for impaired loans amid a Covid-19 pandemicdriven weaker economic outlook and the automatic loan modification loss. Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid commented that overall, it was an extremely challenging year for banks. 

This year’s performance for the sector had been influenced by multiple factors including policy measures and particularly the pandemic which had significantly impacted the economy and how the banks could operate. However, he noted the robust regulatory oversight by Bank Negara over the past years and strict adherence by the banks had resulted in their financial position remaining continually resilient. “This includes the capitalisation whereby the total capital ratio continued to remain healthy at 18.4% in October, which is comfortably above the minimum regulatory requirement of 8.0%. “Similarly, the liquidity coverage ratio remained at 153% in October despite Bank Negara giving some concession on meeting the minimum requirement of 100% following the spread of Covid-19 pandemic. 

“This has allowed the financing intermediation process to happen almost uninterrupted with total loans growing by 4.3% year-on-year in October compared with 3.5% in January this year,” he told Bernama. Apart from that, he said the decline in bond yields had led to significant contribution from gains in marketable securities which had helped to bolster the non-interest income or non-fund based income for the Islamic banking institutions. However, the main concern for the sector is the asset quality, whereby as of October, there was an uptick in the Gross Impaired Financing Ratio (GIFR) to 1.43% from 1.38% in the preceding month, he said. Bank Negara has also projected that the GIFR would rise from an estimated 3.1% at the end of 2020 to 4.1% by end-2021. Moving forward, he said banks needed to remain cautious in their credit underwriting standard.

 “There is also a need to beef up the digital infrastructure in order to ensure that the banks remain agile in the face of stiff competition especially from the non-traditional players which appear to be encroaching into the banking space. “Therefore, fee-based income would be an important agenda as the interest rate is likely to be low for quite sometime,” he added. Meanwhile, Bank Muamalat Malaysia Bhd analyst Izwan Ahmad said going into 2021, the overall sentiment surrounding the global economy seemed to be generally improving with positive developments on the Covid-19 vaccines. — Bernama

(a) “The banks attributed the weaker performance to, among others, lower net interest income, significantly higher allowance for impaired loans amid a Covid-19 pandemic-driven weaker economic outlook and the automatic loan modification loss”. Based on the above statement, discuss how government authorities encourage banks to maintain the flow of credit funds to the economy and mitigate financial risks to the banking system while preserving financial stability in coping with Covid-19 pandemic.

(b) The Covid-19 pandemic has enforced government a broad spectrum of interventions in the markets, helping the country to cushion the impact of the pandemic. In order to maintain effectiveness across interventions, what should the government authorities considered before developing, implementing or adjusting policies forward.