Saturday, January 31, 2009

Bank Negara's ineffective monetary policy, etc

Bank Negara's reduction of the the indicative overnight policy rate or OPR by 75 basis points or 0.75% to 2.5% has not had an iota of benefit to stimulate lending or generate positive economic activity.

There are a few reasons for the failure of this monetary policy:

Refinancing borrowings
All borrowers are motivated to re-finance their existing borrowings to take advantage of lower interest rates. This is basic business common sense. Reduce the cost of borrowing. So, at this point the reduction in bank lending rates is a zero-sum game. Worse still, this monetary policy isn't able to forestall the NPLs from ailing borrowers who are in default of their borrowing obligations.

Banks' natural aversion to risk
Banks prefer to lend to other banks. One of the Malaysian banks that is most astute at this is Public Bank. It may explain why Public Bank is consistently outperforming other banks in terms of profitability. As for lending to businesses, all sorts of risk matrices are being put in place by banks. Banks always prefer to lend to people who are cash rich and, who do not need to borrow. That is the central irony.

No sales, no need to expand business, no need to borrow
With economic contraction local consumption is declining and, export markets are disappearing. Many businesses are more worried about inventory overhang.

Without sales orders only a foolish businessman would want to expand production lines or, increase productive capacity. It would be suicidal. Those businesses that are rushing to borrow must past muster with banks' risk matrices. A good banker's instincts would be to worry about bullish borrowers in a bearish climate.

So, how effective is the policy of having an RM2 billion fund for the Credit Guarantee Corporation to guarantee up to 80% of the borrowings by SMEs? The SMEs will probably take advantage of this policy to re-finance their existing borrowings, that's all.

With jobs at risk, why buy a home now?
As for end-financing for the residential property market, home buyers are dwindling. Why risk buying a house or apartment when your income may decline or disappear as the job market comes under stress from the threat of unemployment? The end-result is fewer borrowers in this sector.

These are just a few factors that I'm hammering down from the top of my head. Didn't Bank Negara consider these factors when they instituted the stupendous 75 basis points rate cut?

The Malaysian saver under pressure
To add insult to injury, the conscientious Malaysian bank depositor is now under pressure since fixed deposit rates have fallen to below 3% per annum. This is an especially cruel blow to pensioners who depend on the interest yield to augment their pensions.

That is why, in a fit of panic, Bank Negara has instituted the RM2 billion Merdeka Bonds at a generous interest rate of 5% a year for Malaysian pensioners or, those over 55 years old.

It is obvious that monetary policy as an instrument to stimulate economic activity is quite useless at this point. Bank Negara should stop considering any further rate cuts because Malaysians will not tolerate the Japanese scenario where depositors have to pay banks for the privilege of depositing their savings. No, that will not do at all.

Another RM10 billion stimulus package?
The first RM7 billion stimulus package was directed at Valuecap and the property sector. The money apparently hasn't trickled down yet.

Speculation is rife that the next stimulus package is worth RM10 billion. Where will that go? That remains to be seen.

Focus on microfinance
Since I don't want to end on a low note I will say this. In an increasingly difficult economic climate, what Bank Negara can and, should do, is to stringently monitor the bank lending to micro-borrowers of RM50,000 and below.

These borrowers are the ones who have interesting business plans that are achievable. They need to be given a chance.

With the spectre of more Malaysians becoming unemployed, there will be more micro-borrowers. Many of these are honest-to-goodness and hardworking Malaysians who have good business ideas that can achieve break-even and paybacks within reasonable time-frames. They may just need some small capital to get started on a new career as a small-business operator.

Use the risk matrix on them, especially their background and business model. Being micro-businesses, the business model is easy to suss-out.

This is the area that Bank Negara and the Malaysian banks should focus on.

The chances of success is high.

It helps to reduce unemployment.

It will help stimulate economic activity.

It's all good with minimum downside risk.


river said...

from a non-economist point of view, this is a great post. are you conveying this somehow to BNM? Its a shame that all your good suggestions do not get realized or at least debated among the decision makers.

satD said...

Dear bro de minimis

How was ur CNY Hols?

Don't think SAGS borrowers are allowed to use the Credit Guarantee to refinance existing credit facilities...

Right now I have a fear of escalating inflation globally especially with the pumping activities in major markets....

Some investors are already moving to gold markets in anticipation of this...

Worst is when they play ping pong with pump i lend back to you.....the reduction was meant for the bankers to search for greater returns than lending to BNM....they must have confidence to do that... that is a must cause if the agents of distributions between surplus and deficit sectors are afraid to do their job then the whole objective fails...

Zahari S said...

What BNM's had done is just following the current trend of lowering intersest rates all over the world. They did not have any idea on how to stimulate the inevitable recession that is finally admitted by the inept government.

Agreed with all of your points that the lower interest rates will benefit the people who did not need the money and allow them to refinance their existing loans and take advantage of the lower interest rates.

As for banks, they have already instituted a stringent lending policies especially to the sme. Based on experience, banks in Malaysia nowadays are not interested to fund loans of less than RM10million. They will say that anything that is lower than RM50million is small and they are not interested.

Another points that BNM need to monitor is the property loans. As we are all aware that landed properties and condos in Klang Valley are selling at about RM300k or more. Such properties are mushrooming because banks feel that such loan is "secured". As we've witnessed the burst of the property bubble in the US and elsewhere, it's only a matter of time that the same bubble in Malaysia will burst. We hope that banks in Malaysia are better prepared to face such bubble bursting experience.

Another issue that BNM need to arrest is the "toll" collection services that is quite rampant in banks when entreprenuers went to get the micro credit loans. Again, from experience and this was reiterated by YB Noh Omar that if you did not grease out, you'll miss out and this is happening everyday.

Finally, what BNM has done so far is to set the macroeconic tones and that is all what BNM has done. Nothing substantial or clear in terms of policy or strategy that they want the banks to play in tackling or the real threat of recession.


Shah Alam