Malaysian small lenders endangered by digital banks' entrance

More competition could jumpstart a build-up of debt within lower-income borrowers.

The proposal to grant up to five digital licences is likely to heighten competition in Malaysia’s banking sector, particularly making smaller banks more vulnerable, according to Fitch Ratings.

Smaller banks are at risk given their modest franchises. “This has put further pressure on margins at a time when growth prospects remain muted. Competitive pressure could heighten as new entrants try to build their pools,” the report explained.

In addition, more competition could jumpstart a build-up of debt amongst the highly leveraged lower-income borrowers, with the new digital players targeting the underserved and unserved retail market. However, such risk could be controlled by regulatory curbs and oversights.

However, Fitch believes the risk could be mitigated for now, as Malaysia’s proposed stipulated end-point capital funds requirement of $73m (MYR300m) is lower than that of Singapore’s. New entrants are also required to demonstrate future profitability through a five-year business plan which could deter unsuitable players, Fitch said.

The new players should have a faster speed-to-market to attract lower income borrowers, the report said, putting the spotlight again on household leverage which remains high in Malaysia. Debt-to-income ratios of households earning less than $370 (MYR3,000) per month have been rising in recent years.