Banks expect recovery in household loan growth in 2H2020

In its Financial Stability Review - First Half 2020 report released today, the central bank said that financing conditions have been further supported by lower borrowing costs following recent monetary policy easing.

"In contrast to business loans, demand for financing by households was generally weaker, reflecting more uncertain income and employment prospects," it added.

The report also revealed that the banking system continues to be well-positioned to support credit flows to the real sector as the economy gradually begins to recover.

Banking system loans recorded an annual growth of 4.1 per cent as of June 2020, mainly driven by growth in outstanding business loans in the wholesale and retail trade, hotels and restaurants, and manufacturing sectors.

"Following the gradual relaxation of the movement control order (MCO), high disbursements for working capital needs were recorded in June. There was also strong demand for loans under the Special Relief Facility (SRF) and other targeted funds for SMEs established by the Bank," it added.

However, BNM also reported that a key challenge for banks in monitoring credit risk developments during this period has been the absence of borrowers’ repayment information due to the extensive coverage of the loan moratorium.

"In response to that, banks have taken proactive measures to assess and manage risks by engaging borrowers more directly on their recovery prospects; increasing the use of data analytics and alternative sources of information (such as facility utilisation rates, cash conversion cycles, and operating account balances) to establish the condition of borrowers; and working with credit reporting agencies to identify early-warning indicators.

"This has enabled banks to identify loans with higher credit risks and pre-emptively build up provisions against future potential losses to ensure their continued resilience.

“Provisions for loans classified as Stage 2 under MFRS 9 increased by RM1.7 billion in the first half of 2020 (June 2020: +27.9 per cent annual growth; 2019: -5.9 per cent), driven by businesses most affected by the pandemic.