I was just having a conversation with a founder of a startup the other day and we talked about property auctions. I told him that sometimes, when the auction has happened a few times and the price has gone very low, the banks themselves may step in and purchase the property instead. Else, someone may buy the property at prices so low it hurts all the stakeholders. They (the banks) have the ability to hold these properties and may sell it again when times are better. However, in the mean time, that property goes into the Non Performing Loan (NPL) numbers first.
NPLs happen when borrowers default on their payments. The banks would then try and recover as much as they could. However, for a start, the loan amount goes into the NPL provisions when borrowers did not pay for 6 months. When this happens, we will then see a NPL number rise for the banks. It will show a rise when more people default and this usually happens during bad times. For example, NPLs were in double digits way back in 1998 (22% to be exact) and it was close to 10 percent in 2006. Here’s that earlier article: Ability to repay is very important So what has happened to the NPLs today?
Article in themalaysianreserve.com Bank Negara Malaysia’s recent data has revealed that the NPLs for the overall banking system has risen to RM28.3 billion as at October 2019 and this is the second highest since May 2011. However, despite this higher number, the ratio of total provisions in October was only 1.44% of the financial systems overall loan outstanding of RM1.75 billion.
MIDF Amanah Investment Bank Bhd senior analyst Imran Yassin Yusof does not expect the situation to become worse. He said, “There hasn’t been a broad base default trend as yet, nor are we expecting any for 2020. Some of the provisions were due to bigger financial assets such as bonds or sukuk that are held by the banks.” He added, “As such, we do not expect provisions to balloon up in 2020, despite the possibility of higher impaired loans.” To look more deeper into what the banks are provisioning, please refer to the Article in themalaysianreserve.com
Many times, looking at just the overall number of RM28.3 billion will seem extremely worrying. However, it is much more important to look at the ratio of NPLs to the overall loans in order to have a better understanding. With a ratio of 1.44% of NPL to the overall banking system, we are definitely healthy. Plus, remember those complaints about rejection of loan applications? Earlier article here: 80% of loans were rejected
The banks are conservative enough as a first layer of defense too. They have their shareholders too. BNM’s Responsible Lending advice is quite strong. Happy knowing yeah.
Next suggested article: BNM has RM1 billion fund for you to borrow from
<Featured Image is courtesy of Stock Photos from Bankrx>