Monday, October 6, 2014

Financing: Why government and banks may have gotten it all wrong

We are pretty good at encouraging Malaysians to borrow more for homes, cars, other consumption purposes but probably not in the areas where it is probably more beneficial to the nation.

How much is my flexible rate loan from a bank if I am to borrow RM1 million? I can get as low as BLR - 2.5%. At the current BLR rate of 6.85%, my effective interest rate is 4.35%. That is historically very low although BLR is not at its lowest. It was as low as 5.5% back in 2009. Bank Negara is trying very hard to regulate interest rates and that in itself is only helpful towards owning a home or a car, which is why consumption loan is at its highest ever, EVER.

Now turn this around? If I am a business owner, and I need a term loan from a bank. What is the interest rate I am paying? I would still be charged something like BLR + 1.5% or even more. That translates to around 8.35% - a whopping 4% higher than if I am to get a housing loan. Would this be friendly towards business? Or would this action be friendly towards the property sector only?

With the differences in rate, if I own a property, I would probably be refinancing my home by taking opportunity of the lower rate (by 4%) to fund my business.

Banks would act upon where it stands to make from the most and it is not surprising that they have been focusing on home loan or other consumption loans such as automotive, credit cards and personal loans recently. Lending for these purposes however is less productive as compared to lending for businesses, which is also why Malaysia has not been very successful in churning out entrepreneurs.

If I am an young entrepreneur, one whom most probably would not be owning many assets, I would be probably be turning towards business loans with little collateral. That is expensive comparatively against buying a home where the collateral is the house. Where as a young person should I be looking at? That young person would probably be less inclined to startup his own business, but ended up investing in a home.

This to me is a move towards wrong direction where as a country, we should be more friendlier towards business entrepreneurship. Is there a reason why we are not entrepreneur friendly, but the type of corporations we have been attracting are only large ones who are able to get loans (non BLR) at much lower rates unlike the smaller corporations.


Unknown said...

Thank you for writing about this. I as a business owner face this problem.

Zuo De

Tabula Rasa said...

But how do you reconcile the risk of lending to an entrepreneur vs lending to someone to buy a home?

The former may fail and may not have collateral to post whereas the latter's property can be auctioned off if he cannot service his loan.

Unless the government agrees to bail out non performing business loans. Do we really want our government to be in this business?

felicity said...

Good point. However, there is no certainty that over lending to the property sector is not a cause for concern as well. I would however think that banks are smart to think through this themselves.

skng74 said...

Banks are also doing business and will certainly pool their resources where it can give them the most profits with lesser risks.