Published on 05 May 2015
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.
Selected requirements under BNM’s new guideline on R&R loans
|
| A banking institution shall
classify a rescheduled and restructured loan in CCRIS as impaired,
except in the following circumstances:i) where a moratorium on loan repayments is granted under specific and exceptional circumstances, such as when the customer is affected by natural disasters. However, the moratorium shall be for a period of not more than 6 months from the date of the customer’s application for the moratorium;ii) the loan is rescheduled or restructured by AKPK; andiii) for retail loans, where a banking institution elects not to increase the instalment amount following an increase in the base rate/base lending rate in cases where the increase is less than RM50 per month. |
| A banking institution shall only remove the R&R classification in CCRIS and reclassify the R&R loan from impaired to non-impaired when repayments based on the revised and restructured terms have been observed continuously for at least 6 months or more, as determined by the banking institution’s policy on R&R facilities. |
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