RAM Ratings views Bank Negara Malaysia’s (BNM) new guideline on restructured and rescheduled (R&R) loans as a prudent move towards strengthening the resilience of the Malaysian banking sector in the longer term.
“The strength of the Malaysian banking system lies in its regulatory framework, which has raised the bar for banks and this new guideline follows on from a series of macro prudential measures we have observed over the recent years” opines Sophia Lee, RAM Ratings’ Co-Head of Financial Institution Ratings.
RAM expects to see an uptick in the industry’s gross impaired loan (GIL) ratio this year resulting from new R&R activity after 1 April 2015, following the implementation of this new guideline.
The new requirement only applies to loans that are rescheduled and restructured on or after 1 April 2015, and not retrospectively.
“Malaysian banks are in a sound position even after considering this potential uptick in the GIL ratio and we still have a stable outlook on the banking industry,” highlights Sophia.
The banking industry’s latest GIL ratio stood at a low 1.6% as at end-March 2015, while it continues to be well-capitalised with common-equity tier-1 capital ratio standing strong at 12.2% while the system’s tier-1 and total capital ratios remained favourable at 13.0% and 14.9%.
This guideline requires the new R&R loans after 1 April 2015 in the Central Credit Reference Information System (CCRIS) to be classified as impaired.
CCRIS is used by banks as part of their assessment of borrowers’ creditworthiness.
We envisage that banks which are more stringent in classifying R&R as impaired will be less affected.
The new guideline will discourage the ”evergreening” of loans as banks will have to set aside provisions once these loans are classified as impaired, which would in turn affect their profit performance.
Based on our estimates, a significant portion of current R&R loans are retail-based and mainly in the form of home mortgages and credit cards.
Based on RAM’s rated portfolio, most banks have a low proportion of R&R loans – less than 3% of their total financing.
Currently, banks’ non-impaired R&R loans ranges from 50% to 80% of their total R&R portfolio.
We envisage R&R loans to be further reduced with the new guideline, as there is less incentive to restructure or reschedule non-impaired loans.
Moreover, impaired loans can only be reclassified to non-impaired status when repayments based on revised and restructured terms have been continuously observed for at least 6 months.
The non-impaired R&R loans (prior 1 April 2015) can be removed from the R&R classification in CCRIS when the 6-months continuous repayment period is observed or based on the bank’s internal policy.
According to the guideline, if the loan is restructured and rescheduled due to factors that are not driven by an increase in the credit risk or with the intention to mitigate repayment risk, the loan need not be classified as impaired.
Meanwhile, the new guideline also pushes banks to elevate borrowers’ instalment payments following an increase in the base rate/base lending rate instead of lengthening the loan tenure to keep the instalment amount constant if allowed under the terms of the facility.
If the increase is more than RM50 and the bank elects not to raise the instalment amount but lengthens the tenure instead, the loan will be classified as R&R and impaired.
This new rule will encourage banks to transfer the cost arising from monetary-policy and market-funding conditions to their borrowers.
RAM expects the OPR to stay at 3.25% this year, barring any adverse growth downside risks.