This article first appeared in The Edge Malaysia Weekly on October 9, 2017 - October 15, 2017

LENDERS that rely on the Malaysian National Cooperative Movement (Angkasa)’s automatic salary deduction system to collect monthly loan repayments from civil servants have managed to reverse a government ruling that would have severely impacted their personal financing business, sources say.

These lenders are development financial institutions (DFIs) and non-bank financial institutions (NBFIs) that include Bank Kerjasama Rakyat Malaysia Bhd (Bank Rakyat), Malaysia Building Society Bhd (MBSB) and Bank Simpanan Nasional Bhd (BSN).

Industry sources say the Ministry of Finance (MoF) sent circulars to the lenders and to Angkasa’s credit cooperatives a few months ago, informing that the monthly deductions would be strictly capped at 60% of the civil servant’s net income, effective June 30. Additionally, the deduction would prioritise government loans.

According to an industry source, the change would have had big implications on both lenders and civil servants, many of whom have “over-borrowed”, taking personal loans from more than one source, often from credit cooperatives.

“While the banks tend to do proper credit checks on the borrower, such as checking on the borrower’s indebtedness level and ability to repay, the cooperatives are not so strict, so suddenly, Borrower A lands himself in a situation where more than 60% is deducted (from his net salary),” the source tells The Edge.

“Capping the deduction at a strict 60%, which is the original policy anyway, coupled with the prioritisation of government loans — Borrower A might have a housing loan with the government, for example — means there would be a shortfall in the monthly repayment to the lenders. This would lead to performing loans going into a default situation. Lenders would be forced to take legal action against the borrower, which could result in bankruptcies and problems for the government’s workforce. It’s a chain reaction.”

“On a macro level, there would have been a deterioration of the personal financing portfolio, which would affect sukuk that have been securitised using personal financing (receivables), which in turn affects the capital market,” the source goes on to say.

DFIs and NBFIs are the biggest players in the personal financing space and the majority of their customers are civil servants. For Bank Rakyat and MBSB, the bulk of their financing portfolio comprises personal financing.

In fact, Bank Rakyat is by far the biggest personal financing player in the industry. Other commercial banks and Islamic banks tap this space as well but it forms a small portion of their total financing, and their customers are mainly from the private sector.

To put things into perspective, Bank Rakyat’s RM56.22 billion personal financing portfolio as at June 30 was almost as large as that of the entire banking system’s RM66.58 billion. (The banking system data that Bank Negara Malaysia releases on a monthly basis does not include DFIs or NBFIs.)

Combined with MBSB’s RM22.64 billion personal financing portfolio as at June 30, the two easily command more than half of the entire personal loan/financing market.

Hence, Bank Rakyat — the country’s largest DFI and an Islamic cooperative bank — and MBSB would have been the worst hit had the ruling taken effect.

BSN, the third largest player, had personal financing of RM11.39 billion as at end-2015, based on the last annual report posted on its website.

According to sources, following the sending out of the circular, some of the bigger institutions immediately engaged with the relevant authorities to explain the far-reaching implications the ruling would have had. It is understood that the matter went all the way up to Prime Minister Datuk Seri Najib Razak.

The circular was “cancelled” at the end of July, the sources said, which means that the ruling was in effect for only a month. Now, however, the strict 60% cap and priority of government loans still stand, but only for new loans, they add.

“From the lenders’ point of view, this is okay, because these are new cases. Lenders just have to be extra careful when vetting new customers. For example, making sure they don’t have housing loan applications with the government. If they do, then the lenders will deem that (as part of the customers’ commitment) that come under the 60%. Then, they decide whether to lend or not,” a source says.

“The government obviously had good intentions by coming out with the (original) ruling, trying to find a way that lets its employees have more disposable income every month. But, it obviously wasn’t a well-thought-out plan … it would have backfired,” the source adds.

The source estimates that up to 20% of civil servants with personal financing/loans would have been affected had the ruling gone through.

The episode casts a spotlight on bigger problems that the government needs to deal with — lax lending practices, by credit cooperatives in particular, and civil servants’ “bad habit” of taking out more than one personal loan.

As at June 2015, there were 12,493 cooperatives in Malaysia, of which 598 were involved in financing activities. These institutions are legislated under the Cooperatives Act 1993 and come under the purview of the Malaysia Cooperative Societies Commission.

Angkasa, the apex organisation for cooperatives in Malaysia, has over the years built a robust interface with the Attorney General’s office that enables the salary deductions for civil servants.

Using this service ensured Bank Rakyat and MBSB stable repayments and this helped fuel the growth of their personal financing business and profitability over the years. It also kept non-performing loans in that space relatively low. Generally, the biggest risk the lenders face is if the borrowers were to leave or lose employment with the government.

As at June 30, Bank Rakyat’s gross impaired financing ratio for that business stood at 0.7%, while MBSB’s was about 3.5%. This compares with the banking system’s gross impaired loan ratio of 2.19% for personal loans in that same month.

For many years, the personal financing business had been the main growth driver for Bank Rakyat and MBSB. However, after Bank Negara Malaysia introduced tighter lending guidelines in July 2013, which included capping the tenure of such loans at 10 years, the lenders made a concerted effort to slow down that business and focus on growing other segments faster.

Bank Negara data shows that outstanding personal financing granted by NBFIs, including major credit cooperatives, grew at a faster rate of 4.8% in 2016 compared with 3.4% in 2015, but considerably slower than the sizzling 30.6% in 2012.

“Concerns remain that some NBFIs may inappropriately ease lending standards, thus calling for continued vigilance and financial education of borrowers,” the central bank said in its 2016 Financial Stability and Payment Systems Report.

Public-listed RCE Capital Bhd too, which is in the general financing business, would have been affected by the original ruling. It provides financing to various cooperatives and foundations, which then lend to civil servants via personal loan schemes with direct salary deduction.

Salary deductions collections are made via Angkasa and RCE’s wholly-owned subsidiary, EXP Payment Sdn Bhd, which provides an alternative solution as a centralised collections agency.

RCE’s ultimate shareholder is AmBank Group’s Tan Sri Azman Hashim, who has a 63.1% stake in RCE via Cempaka Empayar Sdn Bhd.

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