Housing sector NPLs contained - for now

New Straits Times 3/6/2006

The series of bank interest rate hikes over the last five months has led to increasing concerns as to whether it will have an adverse impact on the well-being of the country's housing loan sector, which makes up 27.4 per cent of all the loans offered by commercial banks.

Prior to Nov 30 last year, Base Lending Rates (BLRs) the rate at which, most banks peg their housing loans was six per cent per annum. Today, it has jumped to 6.75 per cent, due to a string of revisions in Bank Negara's overnight policy rate.

As a consequence, property market analysts said housing loans borrowers are facing a double whammy. Not only have their monthly mortgage repayments increased the 0.75 per cent hike equates to an extra RM560 a year per RM100,000 borrowed and repaid over 25 years they also have to cope with higher living costs following the sharp rise in fuel, prices, electricity tariffs and other consumer goods.

Because of this, the analysts said many house buyers are finding it difficult to meet their financial obligations.

That there has been a rise in the number of properties foreclosed upon by banks and subsequently auctioned off only serves to show how many of these financial difficulties have turned into non-performing housing loans. But that's only the beginning of the story.

With investors becoming more circumspect about buying properties in the prevailing environment, the success rate for auctions have declined, with some analysts saying that on the average only one house in 10 is sold. For the remaining nine, the Courts would have to determine a lower reserve price and new auction date for them. And should it still not be sold at the next auction, the process would repeat itself until the property has been eventually disposed of should there be a difference between the final auctioned price and the loan amount (including accrued interest), it would have to be borne by the loan borrower.

Because of the time-consuming process and acrimonious context of the loan recovery, many banks now prefer to negotiate directly with their customers in the hope of finding ways to revive their loans in default.

Evidence so far suggests that many commercial banks have been able to contain their non-performing loan (NPL) problem: Between the end of September 2005 and the end of March 2006, NPLs in the" housing sector as a proportion of the total NPLs in commercial banks rose only marginally from 27.7 per cent to 27.9 per cent.

In terms of ringgit and sen, this translates to a value of RM13.926 billion on the back of RM49. 98 billion in NPL.

However, as it has been only less than six months since the first BLR hike kicked in, market analysts said the default rates for housing loan could, in time, rise further.

Nevertheless, while BLRs may be on the upward trend, current mortgage rates are still significantly lower than the 13.45 per cent experienced during the Asian financial crisis in 1997.

"Bank interest rates," said an analyst, "are not like to reach those levels in the medium term, and therefore banks are unlikely to revisit the past when they were saddled with huge NPLs."

To help contain any rise, Bank Negara did its-part when it announced at the end of its Monetary Policy Committee last month that its overnight policy rate, would not be raised (which would have inevitably pushed BLRs up one more notch) despite global pressures to do so.

But for how long can the Central; Bank hold on? In a carefully worded statement, it said: "Malaysia is not insulated from the inflationary forces being felt globally... and monetary policy wilt continue to ... respond to any risk of inflation becoming a threat to the medium- and longer- term prospects of the economy".

What this means is: Banks have to be extra vigilant in their management of NPLs and should look beyond conventional forms of recovery which have a reputation for being contentious and slow result producing.

If not, the past might come back to haunt them.