THE prime minister was recently reported as saying that Bank Negara Malaysia (BNM) will be increasing the Disaster Relief Facility (DRF) 2022 allocation from RM200 million to RM500 million based on current needs and is working on a repayment assistance scheme for flood victims with car loans, property loans, credit card loans and personal loans. The scheme will include a deferment or reduction of instalments for up to six months.

The central bank, among the first responders, immediately went to work, instead of being a mere bystander. It has demonstrated adroitness and stamina in coordinating multiple policies in a cohesive manner despite the recent floods being considered a one-off shock to economic activities in the country, along with the ongoing pandemic.

The pandemic has hit two flanks of the financial system: financially, with the decline in asset value and loss of liquidity; and, operationally, with the delivery of financial services are threatened by health risks that disrupt lives, facilities, processes and technology.

Meanwhile, floods affect the financial sector both directly and indirectly.

Direct costs include loss of life, illnesses or injuries in the financial industry, damages to fixed assets, capital or physical infrastructure. Indirect costs, which usually constitute a large share of the total damages, are the loss of economic activity and foregone production of goods and services.

Substantial reconstruction spending, together with a possible reduction in tax revenue from the disruptions in economic activity, can endanger the already weak fiscal position of the government, leading to higher debt. Of direct relevance to the financial system, there may be deterioration of deposits, loan growth and quality, and lower profitability of banks.

The indirect costs include the loss of economic activities – which, at the household level, translates to unemployment and the subsequent loss of income – and the foregone production of goods and services. The shortfall in production stems from the damages to physical infrastructure.

These indirect damages include the added costs of employing alternative and inferior means of distribution and production to keep the economy afloat and continuously supply the demand for goods and services, with post-disaster recovery efforts likely to crowd out productive expenditures such as education, health and infrastructure, which may have severe implications on the recovery effort from the pandemic.

The recent floods have shattered a lot of lives, damaging homes and properties – meaning big bills for the people. Capital assets and infrastructure such as factories and their equipment, houses, schools, bridges and roads in all flood-affected areas are lost. Proportionately, the poor suffers the most from the loss of economic assets.

Flood victims are likely to have their savings concentrated in their homes. They may be forced to sell off assets to meet basic needs. As they are less able to replace these assets, they may fall into long-term poverty traps, from which they will be unable to emerge, harming generations.

School enrolment may also fall as parents pull children out of school to help boost family income. Even if this is intended to be temporary, it can become permanent.

Destroyed assets need to be rebuilt and replaced. As flood-affected families struggle to pay for repairs and get back to work, they may begin to fall behind on loan repayments or rent, seek loans to repair flood-related damages or become unemployed. This may lead to ballooning credit card debt. Missing mortgage payments can also lead to the foreclosure on their homes.

Even though there is no universal blueprint for recovery, aside from the above-mentioned measures, effective and swift steps are needed to ease the suffering of individuals and communities directly affected by the floods.

Devising and implementing policy and action for economic recovery in the wake of the floods can be complicated and messy. Nevertheless, it is time BNM departs from its usual gradualist approach to prevent the onslaught of the worst-ever floods from damaging the financial system by introducing temporary small-scale unconventional measures that are targeted and time-bound, buying time for the government to redesign and rescale its recovery plan post-floods.

The central bank should look into granting financial institutions a wider range of regulatory and operational relief measures such as:

- Reduce reserve requirements for the most vulnerable sector, the micro, small and medium enterprises’ (MSME) loans to qualify as compliance with the required reserve ratio e.g. temporary reduction in the credit risk weight of MSME loans and assignment of 0% risk weight for MSME loans covered by guarantees. Cognizant of their economic contribution, BNM and the financial institutions should extend assistance to allow MSME to survive the after-effects of the floods. These MSME have limited access to coping strategies and are generally unprepared to confront adverse events, but play a significant role in the economy. They comprise more than 97.2% of the total business establishments in the country, of which 78.4% are microenterprises that provide 48%, or 7.25 million, of total employment last year;

- Ease the real estate loan limit of commercial banks, but maintaine the soft limits on real estate risk exposures that banks can demonstrably manage;

- Exclude existing loans of borrowers in affected areas from the computation of past-due ratios;

- Reduce general loan-loss provisions;

- Do not impose penalties on legal reserves deficiencies of said banks;

- Book allowances for probable losses on a staggered basis; and,

- Do not impose monetary penalties for delays in the submission of supervisory reports.

The speed of recovery matters. When post-flooding reconstruction is slow, the economic pain and deprivation of families and communities are deep and long-lasting and can alter or create new social and economic inequalities.

The government-offered aid offered via government agencies may not be effective, and its ability to reach the desired target is questionable.

Past experiences have shown that people with lower incomes and in poverty tend to face barriers such as lack of knowledge of the systems through which “survivors” receive aid, discomfort with these systems, issues in getting to and from the designated assistance centres, such as transportation, child care, and work schedules in interacting with bureaucratic systems in receiving aid.

And as fraud is common after disasters, these portions of flood-affected people tend to fall prey to scammers who offer them a loan modification or home repairs for an upfront payment. Sometimes, a scammer will even pose as a government employee or someone from a bank.

BNM must not wait for the next crisis to occur before preparing for it. Candidates for the next crisis include those caused by debt overhang, massive cyberattacks, geopolitical events, climate change or even another pandemic.

BNM has a responsibility to support and implement broader efforts to mitigate the socioeconomic impact of this flood on local businesses and households. – December 23, 2021.

* FLK reads The Malaysian Insight.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.