AS civil servants are already a highly indebted lot, Bank Kerjasama Rakyat Malaysia Bhd’s (Bank Rakyat) continued reliance on personal financing to this segment for growth raises questions over its long-term sustainability, analysts say.

Personal financing has, for a long time, been a sweet spot for the development financial institution (DFI), which is, by far, the biggest player in town, commanding more than half of the market share.

There are some 1.6 million civil servants in Malaysia and the business is considered a relatively safe one given that repayments are automatically deducted from their monthly salary. It is only in the rare event that a civil servant loses his/her job or dies, that problems may crop up.

However, analysts and bankers question how long Bank Rakyat can continue milking this business considering that a large percentage of civil servants are already deep in debt, especially the low-to-middle income segment earning RM5,000 or less.

“Sooner or later, there will be reduced opportunity. That’s why, at the end of the day, as a financial institution, you need greater sustainability and diversity of income,” a banker familiar with the business of personal loans tells The Edge.

This will be a matter for its newly appointed CEO Datuk Syed Abdul Aziz Syed Hassan to deal with.

Syed Abdul Aziz, who became acting CEO on Nov 14 last year after his predecessor Datuk Rosman Mohamed left, was confirmed in the role effective June 18, the Ministry of Entrepreneur Development and Cooperatives announced last Friday. Syed Abdul Aziz was previously the bank’s deputy CEO of operations.

Questions about Bank Rakyat’s long-term sustainability and its role amid a fast-changing banking landscape become more pertinent as some of the other DFIs, such as Bank Pembangunan Malaysia Bhd (BPMB), have been directed by Putrajaya to restructure and merge to strengthen the DFI ecosystem.

In December 2019, BPMB obtained central bank approval to begin merger negotiations with financial guarantee insurer Danajamin Nasional Bhd. It is understood that the government ultimately wants to merge BPMB and Danajamin with two other DFIs, namely Export-Import Bank of Malaysia Bhd and SME Bank Bhd.

There are six DFIs in the country, the other two being Agrobank and Bank Simpanan Nasional Bhd.

Where it stands

For perspective, Bank Rakyat is the country’s largest DFI and the second largest Islamic lender after Maybank Islamic. With assets of RM112.77 billion as at March 31, it is nearly twice the size of Alliance Bank Malaysia Bhd (RM60.72 billion), the smallest of the country’s eight domestic banking groups.

Personal financing accounted for the largest portion, or 75.8%, of its total financing of RM78.06 billion. With a portfolio of RM59.14 billion, it dominates the personal financing/loan market in Malaysia.

As comparison, the Malaysian banking system’s personal use financing/loan segment as at end-March (which includes data from DFIs) stood at RM103.55 billion. This suggests Bank Rakyat’s market share is 57.1%.

Given the automatic salary deductions, the gross impaired financing ratio for the group remains low at 2.12%, albeit higher than the 1.94% a year ago.

To be fair, the bank, under the previous CEO Rosman, did voice its intention to reduce its concentration on personal financing. In an interview with The Edge early last year, Rosman said under the bank’s five-year road map known as BR25, it planned to reduce the proportion of personal financing to total financing to about 70% by 2025. He said the group would continue to grow the segment, albeit at a slower pace, while also pushing growth in other segments such as housing and small and medium enterprises.

However, the 70% target remains some way off. While the bank’s proportion of personal financing to total financing has come down over the years, it continues to stay at above 75%. Last year, it was at 76%.

And, the bank seems to have accelerated the growth in personal financing since the Covid-19 pandemic hit last year. The segment grew 6.94% last year compared with just 1.2% in 2019 and -2% in 2018. Industry observers say this may be a result of it wanting to rely on a stable business during these tough times.

“As long as they’ve got this niche and it’s a profitable one, there’s really nothing to compel them to diversify faster. So, one can only hope that discipline and ethics come into play when they lend to the already highly leveraged civil servants,” a banking analyst remarks.

A Bank Negara Malaysia study in 2018 showed that Malaysian civil servants spend more than half their monthly salaries repaying debts compared with one-third for average borrowers. This leaves civil servants with limited financial buffers to weather shocks and the rise in the cost of living.

The study found that personal financing was one of the major contributors to their debt accumulation, amounting to 34% of their total debt as opposed to the national level of 15%.

Malaysia Building Society Bhd, Bank Islam Malaysia Bhd and RCE Capital Bhd also lend to the civil servant market, but are small players when compared with Bank Rakyat.

“This pandemic period would be the perfect time for Bank Rakyat to build up their other capabilities, train staff, get in the infrastructure … make the most of the current lull period so that when the market picks up again, they [can benefit],” says a banker, who points out that the lender’s current products are very basic.

Based on Bank Rakyat’s unaudited financial statements for the first quarter of the financial year ending Dec 31, 2021, net profit grew 26.3% year on year to RM461.54 million on the back of a 10.9% expansion in net income to RM911.53 million.

This was achieved despite a higher allowance for impairments of RM197.77 million compared with RM173.33 million in the same period a year earlier. Its gross financing book fell by a marginal 0.1% from the preceding quarter.

Governed by the Cooperative Societies Act 1993, Bank Rakyat is essentially a cooperative bank that does mainly retail banking — the bulk of its assets are retail assets — but it also lends to business enterprises and cooperatives. Its shareholders’ funds stood at RM20.94 billion as at March 31, down slightly from RM20.95 billion three months earlier.

Net profit in FY2020 fell for the third consecutive year, to RM1.37 billion, down 15% y-o-y. It was its lowest net profit in at least five years. Bank Rakyat declared a 13% dividend in FY2020, compared with 14% in FY2019, with the payout amounting to RM373.36 million — also the lowest in at least five years.