Time for the banking sector to implement rakyat-centric practice in loans

Vol 2 No 24 | July 2022

Bearing in mind the increase in the Overnight Policy Rate (OPR) by Bank Negara Malaysia will put the rakyat at a disadvantage in having to incur an increase in the monthly quantum of their loans, your Editor, Jamari Mohtar, feels it is time for the banking sector which has performed very well during the two-year pandemic to implement rakyat-centric practice by raising the monthly instalment for new clients only, while leaving their existing clients to the same monthly quantum, since they have taken the loans before the OPR is increased.

The Monetary Policy Committee of Bank Negara Malaysia (BNM) at its meeting on July 6 has decided to increase the Overnight Policy Rate (OPR) by 25 basis points to 2.25%.
The ceiling and floor rates of the corridor of the OPR are correspondingly increased to 2.50% and 2%, respectively.
BNM has taken into account all relevant factors in increasing the OPR, most important of which is the reopening of the global economy and the improvement in labour market conditions that continue to support the recovery of economic activity.
This is consistent with the central bank’s view the unprecedented conditions that necessitated a historically low OPR have continued to recede.
Over the course of the Covid-19 crisis, the OPR was reduced by a cumulative 125 basis points to a historic low of 1.75% to provide support to the economy.
With the domestic growth on a firmer footing, the central bank has decided to begin reducing the degree of monetary accommodation.
This will be done in a measured and gradual manner, ensuring that monetary policy remains accommodative to support a sustainable economic growth in an environment of price stability.
BNM will continue to assess evolving conditions and their implications on the overall outlook to domestic inflation and growth.
Hence, amid the positive growth prospects for the Malaysian economy, BNM has decided to further adjust the degree of monetary accommodation by increasing the OPR.
However, these positive growth prospects have been partly offset by the impact from rising cost pressures, the military conflict in Ukraine, and strict containment of the pandemic measures in China.
Inflationary pressures have continued to increase mainly due to elevated commodity prices and strong demand conditions, despite some easing in global supply chain conditions.
Consequently, central banks around the world are expected to continue adjusting their monetary policy settings, some at a faster pace, to reduce inflationary pressures.

Going forward, the pace of global growth is expected to moderate, and will continue to be affected by the elevated cost pressures, conflict in Ukraine, global supply chain conditions, and financial market volatility.
Unlike some countries, such as the European Union (EU), economic activity in Malaysia continued to strengthen in recent months.
Exports and retail spending indicators affirm the positive growth momentum, supported by the transition to endemicity.
In the labour market, the unemployment rate declined further, with higher labour participation and improving income prospect.
Looking ahead, while external demand is expected to moderate, weighed by headwinds to global growth, economic growth will be supported by firm domestic demand.
Additionally, the reopening of international borders since April 1 would facilitate the recovery in tourism-related sectors. Investment activity and prospects continue to be supported by the realisation of multi-year projects
However, downside risks to growth continue to stem from a weaker-than-expected global growth, further escalation of geopolitical conflicts, and worsening supply chain disruptions.
Year-to-date, headline inflation has averaged 2.4%. While it is projected to remain within the 2.2% – 3.2% forecast range for the year, headline inflation may be higher in some months due mainly to the base effect from electricity prices.
Underlying inflation, as measured by core inflation, is expected to average between 2.0% – 3.0% in 2022 as demand continues to improve amid the high-cost environment.
Nevertheless, the extent of upward pressures on inflation will remain partly contained by existing price controls, fuel subsidies and the continued spare capacity in the economy.
The inflation outlook continues to be subject to global commodity price developments, arising mainly from the ongoing military conflict in Ukraine and prolonged supply-related disruptions, as well as domestic policy measures.

Many have welcomed the central bank’s move in increasing the OPR in light of global rise in inflation rates.
However, Umno Youth chief Asyraf Wajdi Dusuki has warned that a successive increase in OPR will directly lead to a higher cost of living.
It was “inconclusive” to state raising the OPR would keep inflation low, he added.
He pointed out that a family with housing and other loans, and a car would see their monthly costs go up by hundreds of ringgit should loan repayment rates be hiked.
Asyraf is right when he asserted monthly instalment on housing loan would go up with a higher OPR. This is because OPR set by BNM determines the overnight lending rate for financial institutions to lend each other money overnight.
Thus, OPR provide the framework for monetary direction on a national level that ensures banks have a stable supply of available cash.
Because the OPR is so fundamental to the workings of our banking system, changes to the OPR rate often have a domino effect on a range of other economic factors beyond simply lending rates.
The higher the OPR is set, the more expensive it is to borrow money, and the more limited the affordability of accessing capital becomes for both personal and commercial purposes.
That can have a notable impact on the housing sector because with a rise in OPR, it will be more expensive for new property purchasers to take up a home loan product.
In simple term, a higher OPR means banks will pass on the higher borrowing cost in the form of a higher lending/interest rate to consumers, which in turn increases the amount of their monthly instalment payment.
But the Umno Youth chief forgets this is not necessarily true, as changes in OPR does not affect lending rate that is fixed, as opposed to a variable or floating rate.
Moreover, car and personal loans are typically fixed rate loans, which means the lending/interest rate for the loans do not change throughout the period of the loan.
Current borrowers on fixed rate loans will see no change in their monthly instalment as a result of changes in the OPR.
Also, one with a variable or floating housing loan rate can still maintain the same monthly instalment despite an increase in OPR in lieu of an increase in loan tenure.
Banks will always give this option to their clients that are on a variable or floating loan rates whenever there is an increase in OPR to maintain the same monthly instalment in lieu of an increase in loan tenure.
According to the CEO & Founder of GM Training Academy PLT, Miichael Yeoh, if you have a 30-year housing loan of RM500,000 at a floating lending/interest rate of 3.83%, the monthly instalment will be RM2,367.
When the OPR is increased by 0.25%, which means the bank’s lending/interest rate is increased to 4.08%, the repayment period of your home loan will increase by 2 years to 32 years if you choose to keep the monthly instalment amount at RM2,367.
Also, a 0.25% increase in OPR for the same quantum of loan (i.e. a RM500,000 variable home loan with a 30-year tenure) is likely to increase the monthly instalment payment by about RM71, and not by hundreds of ringgit.
So, it can be clearly seen when Asyraf said a family with housing and other loans, and a car would see their monthly costs go up by hundreds of ringgit with an increase in OPR, he is just exaggerating things.
His conclusion that “this is not the right time to consider removing subsidies, floating ceiling prices and raising the OPR because it will directly raise the (cost of living)” is way off the mark.
He is just repeating what the opposition says with regards to removing subsidies and floating ceiling prices when his Umno Prime Minister, Datuk Seri Ismail Sabri Yaakop has clarified that the government will not remove subsidies or introduce floating ceiling prices.
When Ismail Sabri announced this, the opposition decried that he is U-turning on his previous statement of removing subsidies and introducing floating ceiling prices to which the PM responded he is not making a U-turn but simply listening to the feedback of the rakyat.
The amazing thing is the opposition still went ahead with a protest against removing subsidies when subsidies are not removed, and an Umno Youth chief is supporting the opposition in asking the government to do what it has not done.
Even the BNM statement mentioned that the extent of upward pressures on inflation will remain partly contained by existing price controls, fuel subsidies and the continued spare capacity in the economy.

After two difficult years of dealing with Covid-19-related issues, Malaysian banks are likely to do better this year on the back of a recovering economy, a potential hike in interest rates and lower provisions.
However, analysts expect the sector’s net profit to improve only slightly from last year owing mainly to Cukai Makmur, the one-off prosperity tax the federal government introduced last November under Budget 2022.
Maybank Investment Bank (Maybank IB) Research sees the sector’s net profit growing 2.5% this year – it would have been 10% without Cukai Makmur – before rebounding by a stronger 18% in 2023.
Malaysian banks continued to display resilience in 2021 and performed better than in the previous year despite persistent economic headwinds with prolonged movement restrictions, moratoriums and repayment assistance, thanks to the buffers and structural strength built over the years.
According to Moody’s Investors Service, “although the banks would be impacted due to the extended repayment assistance that would affect credit costs and also in terms of profit margins due to a modification cost, structurally the Malaysian banking system has remained strong enough to withstand distress”.
Being well capitalised and liquid enough to withstand unexpected losses that could materialise, Malaysian banks had remained profitable in 2021, with some having performed better compared to 2020.
This is the blessing banks in Malaysia have had enjoyed for its noble efforts to help the rakyat cope with the pandemic.
They managed to report stronger income from more optimised cost of funds (CoF) arising from BNM keeping record low Overnight Policy Rate (OPR) of 1.75% during the challenging period.
The trick is in offsetting low OPR, which had depressed the net lending/interest income (NII), with lowered CoF.
The sector also continued to see higher impairment ratios, especially in small and medium enterprises (SMEs) and retail consumer as loan assistance programmes prompted banks to stock up on provisions.
According to MIDF Research, to mitigate the challenges faced in 2021, the banks had exercised more cost cutting and digitalisation process, and put a tighter loan-vetting process, expanding current accounts saving accounts (CASA) base and focusing more on stable fee income via forays into wealth management and premier banking as well as de-risking exercises and balance sheet rebuilding.

The banking sector is expected to do well again this year. What’s more with OPR currently raised to 50 basis points (25 basis points each in May and July), banks will no longer experience a depressed NII.
Together with continuing to maintain best practices like what they did last year as mentioned by MIDF Research such as optimising CoF, exercised more cost cutting and digitalisation process, etc., they can afford to be on top of the situation despite the challenges of 2022 which is mainly the galloping rise in global inflation.
Perhaps, the time has come for the banking sector in view of the rising OPR at a time when the rakyat is facing problem with the high cost of living brought about by galloping global inflation to implement a rakyat centric and friendly loan regime whereby those of its existing clients with floating rates loans should not be burdened with an increase in monthly instalment due to an increased OPR.
The increase in monthly instalment should instead be limited to its new clients, effective after the OPR has been raised.
With a national campaign for the people to spend within their means in which the banking sector wholeheartedly supports, this could reduce the high household debt in Malaysia.
Spending within one’s mean does not necessarily mean loan growth will be curtailed which will then impact banks’ earning. Rather it means you should and take up loans if you can afford it.
And the acid test for affordability is a good debt-to-income (DTI) ratio. Expressed as a percentage, a debt-to-income ratio is calculated by dividing total recurring monthly debt by monthly gross income.
Lenders (banks) prefer to see a DTI ratio smaller than 36%, with no more than 28% of that debt going towards servicing your mortgage.
For example, assume your gross income is RM4,000 per month. The maximum amount for monthly mortgage-related payments at 28% would be RM1,120 (RM4,000 x 0.28 = RM1,120).
Your lender will also look at your total debts, which should not exceed 36%, or in this case, RM1,440 (RM4,000 x 0.36 = RM1,440).
In most cases, 43% is the highest ratio a borrower can have and still get a qualified mortgage.
Above that, the lender will likely deny the loan application because your monthly expenses for housing and various debts are too high as compared to your income.
Malaysian households have nearly RM1.38 trillion worth of debt, exceeding what the federal government owes to its creditors. Between 2018 and 2021, the household debt in Malaysia has jumped by almost 17%, and this has raised concerns about the country’s debt-servicing ability.
Our household debt-to-Gross Domestic Product (GDP) ratio fell to 89% as at December 2021 from 89.6% in June 2021, according to Bank Negara Malaysia (BNM) in its Financial Stability Review for the second half of 2021, released on March 30.
In 2020, the nation’s household debt-to-GDP ratio had hit a record high of 93.2%.
BNM said the lower ratio as at end 2021 was mainly on the back of stronger nominal GDP growth, but added that it remained on the higher end when compared to regional economies – Singapore (69.7%); Indonesia (17.2%); and Philippines (9.9%).

Read more on OPR, banks’ good performance, subsidies and floating ceiling prices, debt-to-income ratio and household debt:

Monetary Policy Statement

BNM increased OPR to 2.25% – How will it affect your home loan?

Overnight Policy Rate (OPR) In Malaysia: Why It’s So Important

Malaysian banks continue to show resilience in 2021 despite economic headwinds

Five things to look out for in the banking sector this year

Raising OPR again will lead to higher cost of living, warns Umno Youth

PM denies making U-turn over chicken price float

High debt, low pay

Household debt driven by housing, vehicle loans, says finance ministry

Malaysia’s household debt-to-GDP ratio falls to 89% as at end-2021 from a record 93.2% a year ago

Malaysia’s debt-to-GDP ratio could stabilise at 65.5% this year

What Constitutes a Good Debt-to-Income (DTI) Ratio?

PAS president Abdul Hadi Awang said those who encourage the use of English at the expense of the Malay language are doing so because they are still trapped in the colonial mindset.
That is really stretching things too far. A person, even a Malay, may have some handicaps in learning the Malay language but may have the flair to learn English, so his focus on mastering the English language first is justified and has nothing to do with being trapped in the colonial mindset.
Only when you are embarrassed to learn and speak your own mother tongue’s language and feel very proud to speak English instead, can we then say that person is trapped in the colonial mindset.
This is because your mother tongue language is the embodiment of your own culture and identity. You have no choice in choosing your mother tongue because you’re born with it.
So, there is nothing to be ashamed or embarrassed in learning and speaking in your own mother tongue.
As for English, it is now the lingua franca of the world. So attempts must also be made to master the English language.
We live in an era where the West is in the ascendant in many fields including education although some would say that ascendency is waning, so it’s natural the top talents, top universities and top economies are mostly from the West. There’s nothing to be apologetic about this.
Once upon a time when the Muslim civilisation was in the ascendant, it was the Europeans who came flocking to the top-notch universities of the Islamic world then in Baghdad, Egypt and Cordoba to study Arabic before studying any other disciplines because Arabic was then the lingua franca of the world.
So if we want to be successful in this worldly life, proficiency in the English language or any one of the major languages in the West is a must.
For a Malay-Muslim Malaysian, ideally he should be proficient in the Malay language first because it is his mother tongue, followed by a proficiency in the English language in order to be successful in his worldly life.
The next language he should be proficient is Arabic, which will ensure his success in the next world, and finally a mastery of Mandarin in order to understand better fellow citizens who form the largest minority group in the country.
For the Malays, English comes first before Arabic because it is reflected in our daily doa when we pray for the good of this world first followed by the good in the herafter.
Moreover, in the hereafter we are judged by what we have done in this world and so the success of our worldly life comes first.
For a Malaysian Chinese, he should first and foremost be proficient in his own mother tongue, i.e. Mandarin, followed by Bahasa Malaysia as the national language, then English followed by Tamil.
If mastery of four languages is beyond our capacity, then the least we should aim for is mastery in our mother tongue followed by English.
Research done in many universities including universities in the west shows that during the Malaccan Empire, many Malays in Malacca were polyglot – a person who knows and is able to use several languages.
One of these people is the legendary Laksamana Awang Hitam who went on to become Ferdinand Magellan’s right hand man in circumnavigating the world.
Also known as Enrique de Malacca in the West (in some sources he was mentioned as “Henry the Black”), the most famous comprehensive record about him was found in Magellan’s voyage written by Antonio Pigafetta, an Italian who joined Magellan’s crew.
According to Pigafetta, Enrique was a Malay originally from Sumatera, and lived in Melaka. During the Portuguese invasion of Melaka in 1511, Enrique was one of the defenders of the city. He was captured by the Portuguese and become a slave of the Magellan’s team.
With his good knowledge of navigation and ability to communicate in Malay language, Enrique became a useful person for Magellan as he was in need of an interpreter and a navigator to continue his journey to other parts of Southeast Asia after the capture of Malacca (see ENRIQUE DE MALACCA).

As for raising the profile of BM, it is indeed justified, being a national language of the country. All local events organised by government bodies and agencies should therefore be in BM, with translation service in English if the events involved international or regional participation.
We should leave events organised by the private sector to the organiser of the events whether to conduct it in BM, English or any other language suitable to the events and their audience.

The Monetary Policy Committee of Bank Negara Malaysia (BNM) at its meeting on July 6 has decided to increase the Overnight Policy Rate (OPR) by 25 basis points to 2.25%.

BNM has taken into account all relevant factors in increasing the OPR, most important of which is the reopening of the global economy and the improvement in labour market conditions that continue to support the recovery of economic activity.

This is consistent with the central bank’s view the unprecedented conditions that necessitated a historically low OPR have continued to recede.

With the domestic growth on a firmer footing, the central bank has decided to begin reducing the degree of monetary accommodation.

This will be done in a measured and gradual manner, ensuring that monetary policy remains accommodative to support a sustainable economic growth in an environment of price stability.

BNM will continue to assess evolving conditions and their implications on the overall outlook to domestic inflation and growth.

Inflationary pressures have continued to increase mainly due to elevated commodity prices and strong demand conditions, despite some easing in global supply chain conditions.

Consequently, central banks around the world are expected to continue adjusting their monetary policy settings, some at a faster pace, to reduce inflationary pressures.

Going forward, the pace of global growth is expected to moderate, and will continue to be affected by the elevated cost pressures, conflict in Ukraine, global supply chain conditions, and financial market volatility.

Economic activity in Malaysia continued to strengthen in recent months. Exports and retail spending indicators affirm the positive growth momentum, supported by the transition to endemicity. In the labour market, the unemployment rate declined further, with higher labour participation and improving income prospect.

Looking ahead, while external demand is expected to moderate, weighed by headwinds to global growth, economic growth will be supported by firm domestic demand.

Additionally, the reopening of international borders since April 1 would facilitate the recovery in tourism-related sectors. Investment activity and prospects continue to be supported by the realisation of multi-year projects.

Year-to-date, headline inflation has averaged 2.4%. While it is projected to remain within the 2.2% – 3.2% forecast range for the year, headline inflation may be higher in some months due mainly to the base effect from electricity prices.

Underlying inflation, as measured by core inflation, is expected to average between 2.0% – 3.0% in 2022 as demand continues to improve amid the high-cost environment.

Nevertheless, the extent of upward pressures on inflation will remain partly contained by existing price controls, fuel subsidies and the continued spare capacity in the economy.

Many have welcomed the central bank’s move in increasing the OPR in light of global rise in inflation rates.

However, Umno Youth chief Asyraf Wajdi Dusuki has warned that a successive increase in OPR will directly lead to a higher cost of living. It was “inconclusive” to state raising the OPR would keep inflation low, he added.

He pointed out that a family with housing and other loans, and a car would see their monthly costs go up by hundreds of ringgit should loan repayment rates be hiked.

Asyraf is right when he asserted monthly instalment on housing loan would go up with a higher OPR. This is because OPR set by BNM determines the overnight lending rate for financial institutions to lend each other money overnight.

The higher the OPR is set, the more expensive it is to borrow money, and the more limited the affordability of accessing capital becomes for both personal and commercial purposes.

In simple term, a higher OPR means banks will pass on the higher borrowing cost in the form of a higher lending/interest rate to consumers, which in turn increases the amount of their monthly instalment payment.

But the Umno Youth chief forgets this is not necessarily true, as changes in OPR does not affect lending rate that is fixed. Moreover, car and personal loans are typically fixed rate loans, which means the lending/interest rate do not change throughout the period of the loan.

Also, one with a variable or floating housing loan rate can still maintain the same monthly instalment despite an increase in OPR in lieu of an increase in loan tenure.

According to the CEO & Founder of GM Training Academy PLT, Miichael Yeoh, if you have a 30-year housing loan of RM500,000 at a floating lending/interest rate of 3.83%, the monthly instalment will be RM2,367.

When the OPR is increased by 0.25%, which means the bank’s lending/interest rate is increased to 4.08%, the repayment period of your home loan will increase by 2 years to 32 years if you choose to keep the monthly instalment amount at RM2,367.

Also, a 0.25% increase in OPR for the same quantum of loan as above is likely to increase the monthly instalment payment by about RM71, and not by hundreds of ringgit.

So, it can be clearly seen when Asyraf said a family with housing and other loans, and a car would see their monthly costs go up by hundreds of ringgit with an increase in OPR, he is just exaggerating things.

His conclusion that “this is not the right time to consider removing subsidies, floating ceiling prices and raising the OPR because it will directly raise the (cost of living)” is way off the mark.

He is just repeating what the opposition says with regards to removing subsidies and floating ceiling prices when his own Umno Prime Minister, Datuk Seri Ismail Sabri Yaakop has clarified that the government will not remove subsidies or introduce floating ceiling prices.

When Ismail Sabri announced this, the opposition decried that he is U-turning on his previous statement of removing subsidies and introducing floating ceiling prices to which the PM responded he is not making a U-turn but simply listening to the feedback of the rakyat.

The amazing thing is the opposition still went ahead with a protest against removing subsidies when subsidies are not removed, and an Umno Youth chief is supporting the opposition in asking the government to do what it has not done.

Malaysian banks continued to display resilience in 2021 and performed better than in the previous year despite persistent economic headwinds with prolonged movement restrictions, moratoriums and repayment assistance, thanks to the buffers and structural strength built over the years.

According to Moody’s Investors Service, “although the banks would be impacted due to the extended repayment assistance that would affect credit costs and also in terms of profit margins due to a modification cost, structurally the Malaysian banking system has remained strong enough to withstand distress”.

Being well capitalised and liquid enough to withstand unexpected losses that could materialise, Malaysian banks had remained profitable in 2021, with some having performed better compared to 2020.

This is the blessing banks in Malaysia have had enjoyed for its noble efforts to help the rakyat cope with the pandemic.

They managed to report stronger income from more optimised cost of funds (CoF) arising from BNM keeping record low Overnight Policy Rate (OPR) of 1.75% during the challenging period. The trick is in offsetting low OPR, which had depressed the net lending/interest income (NII), with lowered CoF.

To mitigate the challenges faced in 2021, the banks had exercised more cost cutting and digitalisation process, and put a tighter loan-vetting process, expanding current accounts saving accounts (CASA) base and focusing more on stable fee income via forays into wealth management and premier banking as well as de-risking exercises and balance sheet rebuilding.

The banking sector is expected to do well again this year. What’s more with OPR currently raised to 50 basis points (25 basis points each in May and July), banks will no longer experience a depressed NII.

Together with continuing best practices like what they did last year such as optimising CoF, exercised more cost cutting and digitalisation process, etc., they can afford to be on top of the situation despite the challenges of 2022 which is mainly the galloping rise in global inflation.

Perhaps, the time has come for the banking sector in view of the rising OPR at a time when the rakyat is facing problem with the high cost of living brought about by galloping global inflation to implement a rakyat centric loan regime whereby those of its existing clients with floating rates should not be burdened with an increase in monthly instalment due to an increased OPR. Instead the increase should be limited to its new clients.

With a national campaign for the people to spend within their means in which the banking sector wholeheartedly supports, this could reduce the high household debt in Malaysia.

Spending within one’s mean does not necessarily mean loan growth will be curtailed which will then impact banks’ earning. Rather it means you should and take up loans if you can afford it.

And the acid test for affordability is a good debt-to-income (DTI) ratio. Expressed as a percentage, a debt-to-income ratio is calculated by dividing total recurring monthly debt by monthly gross income.

Lenders (banks) prefer to see a DTI ratio smaller than 36%, with no more than 28% of that debt going towards servicing your mortgage.

For example, assume your gross income is RM4,000 per month. The maximum amount for monthly mortgage-related payments at 28% would be RM1,120 (RM4,000 x 0.28 = RM1,120).

Your lender will also look at your total debts, which should not exceed 36%, or in this case, RM1,440 (RM4,000 x 0.36 = RM1,440). In most cases, 43% is the highest ratio a borrower can have and still get a qualified mortgage. Above that, the lender will likely deny the loan application because your monthly expenses for housing and various debts are too high as compared to your income.

Malaysian households have nearly RM1.38 trillion worth of debt, exceeding what the federal government owes to its creditors. Our household debt-to-Gross Domestic Product (GDP) ratio fell to 89% as at December 2021 from 89.6% in June 2021, according to BNM. In 2020, the nation’s household debt-to-GDP ratio had hit a record high of 93.2%.

BNM said the lower ratio as at end 2021 was mainly on the back of stronger nominal GDP growth, but added that it remained on the higher end when compared to regional economies – Singapore (69.7%); Indonesia (17.2%); and Philippines (9.9%).

Regards,

Jamari Mohtar

Editor, Let’s Talk!

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