Banks exercise sound lending and valuation practices in commercial property lending

September 8, 2017
Kuala Lumpur, Friday, 8 September 2017 – In response to the article entitled “Banks to blame for shopping mall glut, says expert” in Free Malaysia Today on 5 September 2017, The Association of Banks in Malaysia (ABM) strongly refutes the claim that banks are responsible for the glut in supply of retail and office space in the Klang Valley. We also object to the allegation that banks had been giving out loans for the development of commercial properties without due diligence.

Our member banks have in place stringent processes for credit risk assessment supported by sound lending and valuation practices. Thorough credit analysis is performed before any financing for commercial properties is granted. This may include, but are not limited to, conducting project feasibility studies performed by independent parties or in-house commercial property experts, marketability and competitors’ analysis, assessment of economic and market developments, as well as repayment capability, to ensure the viability of the project. Any projections are assessed for reasonableness and sensitivity analysis will be carried out.

In cases where the borrowers engage independent valuers/consultants to prepare a feasibility study as part of the submission criterion for the loan applied, the said report will still be subjected to the bank’s own assessment and risk appetite. Moreover, banks do not rely solely on feasibility/valuation reports as other factors and criteria, such as the developer’s financial standing, track record and multiple sources of funds for repayment, would also be considered in the assessment of loan applications.

Banks take into account the current and medium term commercial property market situation such as supply within the vicinity (both existing and incoming), demand, general economic trends, rental and occupancy rates. For purposes of evaluating applications for the financing of shopping malls, banks would additionally consider the population size and growth, purchasing power and potential growth in retail spending within the surrounding areas, as well as the outlook of the tourism industry, but to name a few.

For some of our member banks, the financing of commercial properties and shopping malls requires an elevated degree of risk assessment and higher approving level. Generally, these banks would not finance shopping malls unless they form part of the integrated wider financing requirement e.g. township development or high rise residential development. Thus, banks’ appetite for financing of such projects is relatively low and the direct risks to banks from exposures to the office space and shopping complex segments remain small.

ABM would like to reiterate that banks are only one part of the ecosystem that is responsible for the creation of these properties and are not the only party that provides financing for the same. Banks are also certainly not the part that is responsible for the creation of the entire supply of and demand for such properties. All stakeholders should work collaboratively to address this issue more effectively for the betterment of the nation.
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