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News & Events

[ 26-08-2013 ]
Basel III can affect SME loans, financing may become more expensive

PETALING JAYA: Small and medium enterprises (SMEs), which make up about 98% of business establishments in Malaysia, could experience a slower growth as loans to this sector potentially becoming more expensive with the implementation of the Basel III ruling.

Financing to SMEs could come under pressure, according to some industry observers and analysts who feel the global banking regulatory standard will pose a challenge to banks as it could make SME financing to become more costly.

OCBC Bank (M) Bhd country chief risk officer Choo Yee Kwan told StarBiz that although most Malaysian banks had enough capital buffer and the additional requirements under Basel III, financing costs for SME loans could still increase in the long run.

Nevertheless, he added that banking regulators had a certain degree of “national discretion” in respect of the local implementation of the ruling which could have some impact on the final design of the Basel III.

Choo said should financing cost edged upwards in the future, banks would have to decide whether the cost would be absorbed or passed to consumers, adding that the decisions taken by banks could vary among themselves and might be a factor in the cost of financing for customers in the SME and corporate segments.

“Where lending volumes are high, there is the possibility that banks can consider absorbing the incremental cost (whether in full or in part). Naturally, this will be more applicable to banks with greater marketing reach and networks and those with higher levels of customer penetration,” he said.

For OCBC Bank, he said it would seek to address the situation by developing more innovative products and solutions while for banks in general, they could also try to optimise the portfolio risk-weighted assets of SME and corporate segments by using better risk-assessment tools as these would have a direct impact on capital requirements for banks.

Some banking analysts felt the requirements of capital buffers above that of the capital ratios under Basel III could put some pressure on financing.

Maybank group chief risk officer Dr John Lee was quoted by Bernama recently as saying that under Basel III, banks would need to have more capital and liquidity which would lead to increase in costs.

Lee said that due to the stringent requirements under Basel III, some of the businesses might move their sourcing of credit to unregulated and opaque segment, like shadow banking, as the regulated banks affected by the ruling might not want to lend to a particular sector.

Basel III, which has been implemented in stages starting this year, requires banks to have stronger capital positions to better meet risks.

Meanwhile, Ernst & Young Malaysia partner of financial services Chan Hooi Lam said although SME businesses that were of higher risk in nature required a greater amount of regulatory capital, SME lending was able to provide relatively higher margins which may be more than sufficient to compensate for the regulatory costs.

The continuing margin compression challenge in the banking sector may encourage the re-balancing of credit portfolios away from other lower margin lending to SMEs, he noted.

“Net interest margin (NIM) for banks in Malaysia is about 2.4%, which is lower than 2.8% in the United States and slightly higher than the United Kingdom’s 2.1% and Australia’s 2.2%.

“Our margin is lower compared to countries like South Africa of over 4% and Indonesia of over 5%. Thus, maintaining NIM and profitability is seen as a major challenge by banks in Malaysia,’’ Chan said.