On lending, housing and minister’s comments
FINANCE Minister Lim Guan Eng has retracted his threat to impose a windfall tax on the banking sector two days after he issued it at InvestKL.
He clarified: “Since we don’t impose windfall taxes, we hope they (banks and lenders) can be more flexible in their lending arrangements since they are making so much money; share a bit.”
Whether Lim retracts his threat, or clarifies that his threat was not actually a threat, the substance of his words on Tuesday and Thursday is a revelation.
Lim said he has been getting a lot of complaints from individuals and businesses about inflexible lending. In short, he is urging banks to relax lending.
Because buying a house is a big ticket item, it follows then that lending is the mainstay of the housing industry.
The high house prices faced by Malaysians and many other countries today is a result of measures undertaken by central banks and the lending institutions the past 10 years.
Malaysia and other countries arrived at this juncture of “runaway” house prices because something happened after the 2008 global financial crisis.
Easy credit was used sell houses and other assets. Speculators bought multiple units. Developers pumped in more units, pricing them increasingly higher with each subsequent launch until houses were beyond the reach of masses. Banks provided the financing because that’s how they make their profits. That in a nutshell sums the past 10 years.
But banks making record profits and potential borrowers unable to get the leverage they want, are two separate issues.
Banks earn their profits from lending. If they do not lend, their profit takes a dip. Likewise, if developers do not launch, their sales dry up.
Properties are bought based on financing and the leverage of financing provided by banks, it is therefore a given that banks have been lending.
Generally, residential mortgage is the biggest loan segment, making up about 33% of most Malaysian commercial banks loans.
However, although banks profit from lending, it is too simplistic to say that because record profits were made, so banks should lend more. It is illogical to say because they make record profits, they should share a bit.
If the economy falls, the first sector to fall would be the banking sector because of the leverage they carry in their books.
Being a steward of the country’s financial system, he must know that lending comes at a cost, and that growth funded by debts is unsustainable.
According to Bank Negara’s Housing Watch website, housing loans are rejected because borrowers are already highly indebted. They have very little residual income after deducting monthly living expenses. They are rejected because they have poor past track record and have poor or little financial discipline.
Their loan applications are not supported by documentation.
As of end of September, 2018, overall housing loan approval rate was at 70.9%.
The role of Lim is to ensure a strong financial system, that banks are well capitalised. It is not his role to ensure that everyone who wants a loan gets the leverage he seeks.
His stewardship and fiduciary duty towards this country is far more important and urgent than being a populist politician, pandering to this or that lobby. He has to stay the course and not be moved. Neither can he afford to view this complex issue of politics, lending and housing through simplistic lens or be myopic.
Like an art connoisseur, Lim must stand back to consider the painting, instead of focusing on a corner of that big picture where lobbyists and borrowers are clamouring for his attention. It is not his role to be Robin Hood because too much is at stake.
As Socio-Economic Research executive director Lee Heng Guie said: “Both the public and private sectors must work together to prevent an over-adjustment in property sector as it not only affects other economic sectors but would also drag down the banking system, which has over 30% of total loans portfolio extended for the purchase of residential property.”