THE EDGE WEEKLY ISSUE#1000
THE WEEK OF FEBRUARY 13 –
JANUARY 19, 2014
By: BEN SHANE LIM
Depending on the borrower’s
profile, banks’ rates for retail loans could change after March 17 when Bank
Negara Malaysia (BNM)’s risk-informed pricing (RIP) policy is implemented.
The policy will ensure
that banks adequately price in risks to their loans while pursuing a
commercially-driven pricing strategy. This
comes at a time when the property sector has been hit with a slew of cooling
measures and the automotive sector is expecting slower sales this year.
What will be the impact
on borrowers?
Kenanga Research’s head
of research Chan Ken Yew says risk-based pricing will benefit high-quality
borrowers who could see lower rates while high-risk borrowers will have to pay higher
rates.
“At present, banks are
offering rates that are very much the same for most borrowers despite the fact
that they may have different risk profiles.
This is because most banks take the portfolio approach and price their
loans based on the overall average risk of borrowers. Therefore, they are able to cover their
credit costs because this is priced in to their average landing rate,” says
Chan.
However, this means that
borrowers with relatively good credit scores are subsidising those with higher
risks, he says. “Take, for example, two
borrowers of equal financial standing each applying for a RM1 million loan to
buy property. One buys a single property
with loan-to-value (LTV) ratio of 90% while the other purchases three
properties. However, because one can
only borrow up to 70% LTV on the third property, the second borrower’s overall
LTV is about 83%. What we are seeing now
is that they borrow at similar rates despite the fact that the first borrower
has a gearing of 9 times compared with the second borrower’s 4.9 times,”
explains Chan.
Ideally, the second
borrower should get better rates than the first, and the RIP policy will
encourage such lending practices.
Another example is that
there is barely any spread between shorter loan tenures and longer ones, notes
Chan. “If you look at the bond market,
interest rates are about 10 basis points higher for each extra year. On that basis, a 15-year loan should be 1.5%
cheaper than a 30-year loan, but that is not the case at the moment.”
There is some concern
that there could be an increase in the average lending rate once the policy is
implemented, given that lending rates have been trending down while house hold
debts have risen to worryingly high levels.
Since 2007, household
debts have climbed from 65.9% to GDP to more than 80% in 2013. At the same time, BNM data shows that the
average lending rate of commercial banks has gone from 6.6% to 4.56%.
Notably, with roughly
RM300 billion in liquidity in the banking system, banks had to sell more loans
to maintain their loan-to-deposit ratios.
On top of that, the property boom in the past few years fueled demand
for housing loans, particularly with the highly popular developer interest
bearing scheme.
Another area of concern
is hire purchase loans that are at rock-bottom rates, considering that motor
vehicles are assets with depreciating values.
According to one senior banker, AAA customers could secure rates as low
as 2.3% while the average rate at the moment is around 2.4%.
AMMB Holdings Bhd group
managing director Ashok Ramamurthy says AmBank is already practising risk-based
pricing.
“It (the lending rate)
depends on the profile of the customer. We
differentiate our pricing based on a whole range of characteristics. So, the riskier the customer, the higher the
price. We’ve generally said that
margins, after cost of funds, will be in excess of 200 basis points,” he says.
Nonetheless, in a written
response to The Edge, BNM points out that the RIP policy is not a
measure specifically intended to curb lending to households. It emphasises that the decision to alter
rates remains with the banks.
Instead, it’s meant to be
a pre-emptive prudential measure to ensure that the financial service providers’
(FSPs) risk management practices are robust to face the increasingly intense
competition in the retail loan segment, says the central bank.
“In managing risks, the
policy requires the FSPs to look at pricing of all retail products and ensure
that adequate information of the associated risks is taken into account in
arriving at pricing decision,” it says.
Chan says from the banks’
perspective, it is hard to say what the impact will be at this stage as it will
depend on a myriad of factors ranging from risk appetite to funding costs. However, he points out that it should not
have a negative impact on banks’ earnings as any change in rates will be offset
by a corresponding adjustment to the banks’ credit costs.
“The risk-based pricing
should not have a substantial impact on average lending rates. I can’t speak for the other banks, but our
bank has already been practising stringent risk management policies. If anything, rising inflation and the
likelihood of BNM raising the overnight policy rate (OPR) is more likely to
result in a hike in interest rates going forward,” says one senior banker.
The OPR has remained
unchanged at 3% since May 2011.
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