Malaysian banks hope for lower interest rate

Malaysian banks hope for lower interest rate

Eileen Ng, Agence France-Presse, Kuala Lumpur

Malaysian bankers are hoping the central bank will cut interest rates this month to spur lending and ease companies' debt burdens under an economic stimulus package to counter the twin blow of the SARS crisis and Iraq war.

Bank Negara last cut interest rates in the aftermath of the Sept. 11, 2001 terrorist attacks in the United States, and some analysts have portrayed the SARS crisis as Asia's equivalent to the "9-11" disaster.

"There's a lot of anxiety over the softening of the global economy. In the region, we have got to deal with SARS and the aftermath of the Iraq war," said Tan Teong Hean, chief executive of Southern Bank, one of Malaysia's 10 anchor banks.

"There is enough softness in the market to perhaps consider interest rates as a means by which to stimulate the economy."

It is tough for local banks to meet Bank Negara's target of eight percent loans growth this year amid persisting uncertainties, Tan added.

Low interest rates were central to Malaysian's recovery after it plunged into its deepest recession in more than four decades in 1998 following the Asian financial crisis.

Bank Negara cut its key intervention rate from 9.5 percent to 5.5 percent in 1999, and slashed it further to the current 5.0 percent in September 2001.

Its intervention rate largely determines interbank lending rates, which in turn are the basis on which commercial banks calculate their base lending rates (BLR).

Bank Negara has described current rates as accommodating and said it would not fiddle with interest rates to grow the economy.

But there has been heightened talk in the banking community of a rate cut to mitigate the impact of Severe Acute Respiratory Syndrome, which has devastated businesses here even if the actual health impact is not as severe as that in other countries.

Malaysia has cut its official economic growth forecast to 4.5 percent this year from 6.0-6.5 percent, but fears it could slide even lower.

The New Straits Times has quoted bankers as saying that the government was mulling a 50 basis points cut in the intervention rate, which could push BLR down to 6.0 percent from its current 6.40 percent.

Interbank rates could also fall by 10-20 basis points, making it cheaper for banks to borrow money from each other, it said.

The rate cut was likely to coincide with an economic stimulus package expected to be unveiled by Prime Minister Mahathir Mohamad in mid-May, it added.

Former banker Ramon Navaratnam said it was crucial for banks to lower lending rates quickly to help businesses grappling with severe cashflow problems.

"The SARS virus is causing a lot of havoc here and the economy is under great stress," said Navaratnam, a corporate adviser to the Sunway Group.

"So if the interest rates go down, it signals that the government is doing something now. You can't wait. If you wait too long, it's like trying to help somebody who has already fallen too ill.

"We need to nip the problem in the bud. The help will be more valuable earlier rather than later, otherwise it may be too late."

Apart from alleviating their financial burden, Navaratnam said a rate cut would also raise confidence in the business community.

"It signals that the government is concerned and is a friend in need. It's important from a psychological point of view to raise their spirits and to show we are in it together," he said.

But Bank Negara must ensure that BLR is lowered accordingly and that banks do not ease their lending activities, he added.

Abdul Azim Zabidi, chairman of the national savings bank, also supported a rate cut to ease companies' debt burdens and said this would not hurt banks' profit margins.

He said banks were still being "ultra cautious" in issuing loans due to past bad experience and urged them to stop being "mere moneylenders" and to learn to mitigate risks.

An interest rate cut will mirror moves by India and New Zealand's central banks last month. South Korea is also considering a rate cut to bolster the economy.