Banks muddy Malaysia's recovery plans

By M. Jegathesan

KUALA LUMPUR (AFP): The "ultra-conservative" lending policies adopted by Malaysian banks to prevent bad loans may derail an economic recovery just as it gathers steam, economists and businessmen warn.

Ramon Navaratnam, a former treasury deputy chief told AFP that some bank officials had adopted very conservative lending policies in order not to have to make any decisions on loan applications.

"Some bank staff are inefficient and are not able to make good business decisions while some find the easy way out by adopting an ultra-conservative approach in not approving loans," he said.

Navaratnam, now an adviser to construction giant Sungei Way Group, said Malaysia should allow foreign banks more entry to give local institutions some competition.

"By protecting the local banks, we might erode the capacity of our recovering economy to sustain its remarkable recovery," he warned.

Finance Minister Daim Zainuddin said last Friday a number of public complaints had been made that it was difficult to secure loans, and that in most cases applications were rejected without explanations.

Navaratnam, also a former bank chief, said the economic recovery could be stalled and growth become unsustainable if banks do not carry out their lending obligations.

"The government should pull up the respective bank chiefs. Those who defy the government's call should be replaced or else public confidence in the government will be affected," he added.

Malaysia has rebounded impressively from the July 1997 Asian economic slump.

Mustapa Mohamed, an economics adviser to the ministry of finance, said last Saturday that Malaysia's economy had the potential to grow 7 percent a year.

In March, the central bank said Malaysia's economy may grow even faster than the official 5.8 percent prediction for this year, up from 5.4 percent last year. The economy plunged into its first recession in 13 years in 1998.

Sani Hamid, an analyst at Standard and Poor's MNS International in Singapore, said loan growth figures in Malaysia have not been encouraging, adding that "it is worrying if fewer corporations borrow."

"The target of 8 percent in 1999 was not achieved. It only recorded one to 2 percent," he said.

Sani said corporations borrow to expand and to buy new machinery, adding that it was a form of domestic investment needed to sustain Malaysia's fragile recovery.

Even though banks are enjoying good spreads -- the inter-bank rate is 3 percent while the base lending rate is 7.2 percent -- they are still not lending, he said.

"Banks are being very conservative. They fear being saddled with non-performing loans again," Sani said.

Sani said domestic investment growth was vital since the government aimed for that to be the engine of growth if the current export-led surge is affected by a slowdown in the U.S. economy.

"Growth of domestic investment is needed to keep the economy on track," he said.

A local businessman who asked not to be named said banks were not providing loans to boost production capacities, and even taking away existing credit facilities.

"We are short of funds. Banks demand unrealistic amounts for monthly repayments. Our sales are low since we are unable to buy foreign raw materials for our production," he lamented.

He said the credit crunch has so far lasted three years, since the Asian financial crisis.

"We are in the doldrums. The situation is critical. I may have to close my business since banks are not listening to our appeals," he said.