Prime Minister Dr Mahathir Mohamad has prodded Malaysia's cash-rich banks to issue more loans to help spur economic growth but the lenders are torn between prudence and profit, analysts say.

Mahathir, who is also finance minister, has expressed impatience with local banks' cautious lending policies and chided them for only "seeking excessive profits and opting for safe and non-risky investments."

In his speech on September 20 to unveil the 2003 national budget, he urged banks to increase lending or else the government "may be compelled to increase the statutory reserve requirement (SRR)."

The SRR, currently at four percent, is the amount that commercial banks are required to keep interest-free with the central bank and is used to calculate the base lending rate (BLR).

Analysts say the government may raise SRR for banks without allowing an increase in BLR, which will hurt bank profits and deny them a chance to earn higher yield on funds.

Cash crunch

Mahathir's warning to banks also highlighted a cash crunch among small local industries, which the government aims to nurture to spur economic growth at a time when foreign investments are drying up, they say.

His threat to raise SRR has spooked banking stocks, with the finance index falling 5.2 percent and the stock market slipping 3.8 percent in the week to Friday.

"The sell-down in banking stocks reflected the worry that the government is abandoning caution in simply pushing growth," said Jupiter Securities research chief Pong Teng Siew.

"Banks are walking a tightrope. They want to lend but they also want it to go to good credit. It's a tough balancing act."

Most bank lending is currently channelled into the auto and property sectors, and few of Malaysia's 10 banking groups have met the government's target of an eight percent loans growth.

For instance, top bank Malayan Banking last week said it expected a loans growth of six to seven percent in the year to June 2003 after a decline of five percent this year.

Pong said the government would be "barking up the wrong tree" if it hoped to use loans growth to boost economic expansion, as financial data have suggested otherwise.

"The current low rates show that banks are prepared to lend at very low margins but this means they cannot afford to take a lot of risks nor incur higher non-performing loans (NPL)," he said.

SMIs suffer

Banks NPLs, which soared to double digits during the 1997/98 Asian financial crisis, have dropped to below eight percent, thanks to debt restructuring by large corporations.

But analysts say it is the small- and medium-sized industries (SMI) which are suffering as many lack the financial muscle and desperately need cash to roll amid current economic uncertainties.

"It's a different story for the SMIs which are facing a severe cash crunch. They need funds to fuel growth but financing is an impediment," said Nizam Idris, regional economist with IDEAglobal Ltd. in Singapore.

Jupiter's Pong said the banks' dilemma was compounded by the fact that many businesses were tainted with poor credit history due to the country's economic recession in 1998.

"The culture then was to rescue and bail out firms, so we now have the same group of troubled companies with the same shareholders. We are left with this legacy and there is no ready answer," he said.

Minimal impact

Most analysts, however, say wielding the SRR as a stick is unconventional and unlikely to loosen banks' credit standards.

Merrill Lynch said in a report a SRR rise would have minimal impact on banks' willingness to extend credit to perceived high-risk sectors amid insufficient loan loss coverage ratios and fear of higher NPLs.

"It is difficult to make a case for lending in a no-growth situation but fresh lending is crucial for SMIs," Pong said.

"If Malaysia wants to strengthen its domestic sources of growth, it must settle this issue which is casting a shadow over the country's fragile economic recovery."

The government forecast economic growth of six to 6.5 percent in 2003, up from four to five percent this year but the 2003 target is deemed too bullish by most economists. AFP