Wednesday, July 10, 2013

The Banking Industry - New Measures By BNM and Its Implications ...



BNM has announced the implementation of the FSA and IFSA effective July 2013.

1. Permissible Shareholding Level … Despite concern that the new rules will impact the major individual shareholders of PBB, HL Bank and AMMB, interest in financial institutions acquired prior to the now (July 2013) repealed BAFIA 1989 will continue to be grandfathered and therefore exempted from the new rules under the FSA.
 
Under the new FSA, holding companies that own more than 50% of licensed financial institutions governed by BNM will also be subject to the supervision of the central bank.
 
Holding companies such as CIMB, RHB cap, AMMB, Affin, Alliance and even DRBHicom (which owns 60% of Bank Muamalat) will now be subject to the supervision of BNM.
 
2. Overseeing The Shadow Banking Industry (Bank Rakyat and MBSB) A shadow bank is essentially a term used to describe institutions that take on bank-type functions. They are lenders that are not governed by Bank Negara before this but compete with the banks in lending money to the public. But not anymore as the new FSA has allowed the central bank to get the shadow banking industry to comply with its rules on lending.



The curbs will ease the rapid expansion of loans growth seen by the NBFIs. The new lending guidelines will also slow loans given to the household sector by the commercial banks.

3. New Rules To Reduce Household Debt … Property buyers will no longer have the option to take loans for longer than 35 years. Anyone taking a personal loan can now (July 2013) only do so for a period of up to 10 years. Before the new caps, property buyers could take loans for up to 45 years, while personal loans could be paid back over a period of up to 25 years.
 
Industry players said the measures would have a limited impact on the property market because the older generation of Malaysians had already bought into the property cycle. The latest caps would mainly affect the younger generation.
 
4. Tightening Of DIBS … BNM could be looking at curtailing real estate financing packages, such as the developer interest bearing scheme (DIBS) could also scorch interest in the property market.



Some says most sales in the property bull cycle could have been supported by DIBS, which allows purchasers to enjoy interest free commitments during the construction of properties. If DIBS is to be tightened, it could significantly dampen new property launches because the speculators would be filtered out.

Under DIBS, buyers need only make a minimum down payment for properties under construction while the developer services the interest payments.

The tightening of DIBS or such schemes may impact the high end lifestyles products in the central region that have seen speculative buying. Buyers relying on such schemes to bet on multiple properties may thing twice because without DIBS, their cash flow will be crimped.

However there will certainly be an impact on property developers but only for the short term as developers and buyers adapt to the changing economic circumstances. It is likely that buyers will hold back their purchases or shift their attention from the primary to the secondary market where prices have lagged.
 
Much focus has been placed on curbing the rising prices of properties but will it be a cause for concern when it comes to the country’s economic growth? Given the slower-than-expected growth in the country’s economy in the first quarter of 2013, some concerns were raised should the measures become a drag to economic performance, especially when the global economy is shaky and the country’s economy is driven by domestic demand.

Malaysia’s gross domestic product (GDP) growth in the first quarter 2013 was lower at 4.1% compared with 5.1% in the corresponding period last year. The pace of growth was the lowest since the third quarter of 2009.

Measures to curb property prices from accelerating significantly may have some impact on domestic demand and economic growth, but they will not be significant to impact the overall economic growth.

Stronger property prices in the short term could strengthen investment and consumption spending, giving a positive impact on domestic demand. However, in the long term the impact of property prices becomes neutral on domestic demand and economic growth.

Focusing on the property market as a policy tool should be more for short-term macro-economic management. Over-stimulating the property market may not effectively contribute to economic growth.

The potential curbs on the Developer Interest-Bearing Scheme (DIBS) will only moderate property sales. Sales include a large proportion of purchases for investment purposes, they will not dampen private consumption significantly.

Malaysia’s economy growth is mainly driven by investment, hence some measures to curb property prices will not cause some downside risks to the economy. The potential move to curb DIBS could help to reduce speculative activities in the property market so that prices are reflective of market forces.
 
There would be some correction in property prices, however the impact could be temporary. It helps to re-balance the focus in the economy rather than being over-dependent on a sector and it helps to curb an asset bubble.
 
Measures such as the incremental real property gains tax (RPGT) hikes seen over the past two years (2011-2012) had resulted in temporary correction before rebounding.
 
On the proposed property tax on foreign buyers in Johor, industry observers opine that higher property taxes on foreigners would not dampen demand, as Johor properties are much cheaper than those in Singapore.
 
The measure is good for the long-term sustainability in demand as the influx of foreign buyers could cause sharp spikes in asset inflation, especially when foreign buyers from Singapore have an advantage on foreign exchange, which could lead to a property bubble.
 
There is a concern that more fiscal tightening measures on the property sector such as higher RPGT could surface in Budget 2014.
 
The cause of strong price increases in recent years prior to July 2013 is mainly due to supply constraints as opposed to excessive demand. In fact, any move by the authorities to curb speculation may have the unintended effect of slowing down supply growth, which would in turn exacerbate price increases over the longer term.

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