A Potential threat Against RCE

There seems to be something in the air these days.

First it was CUEPACS wanting to do its own deductions for civil servant retail loans. If they could do so, it would save some money for civil servants and literary break the monopoly of the National Cooperative Organisation of Malaysia, or Angkasa, as a middle man conduit for such payments.

Now, rumour has it that a number of commercial banks are planning to break into the lucrative market of lending to government employees after being allowed to make automatic salary deductions.

Presently, only credit cooperatives and a number of government-owned financial institutions are provided with the special codes that allow these salary deductions.

It is understood that the move is aimed at liberalising the landscape in order to benefit the borrowers, namely the over one million government employees.

The entry of commercial banks should spell lower interest rates and better service levels but may also jeopardise the profitability of existing players.

The market for these loans is huge.

According to a document obtained by StarBiz, civil servants forked out a whopping RM590mil in loan repayments for the month of August alone under this scheme.

It does seem to be a great business to be in.

The government-initiated monthly salary deduction means that the loans are virtually risk free, keeping non-performing loan levels extremely low.

Angkasa, the national union integrating the various cooperatives in Malaysia is weary of such developments.

Over the years, Angkasa has built a robust interface system with the Accountant-General’s office that enables the salary deductions.

The approved lenders – the 450-odd credit cooperatives and government-owned financial institutions such as Bank Rakyat, Malaysia Building Society,Bank Simpanan Nasional and Agrobank – have to use Angkasa’s services for the deductions.

Angkasa netted RM6.3mil in transaction fees in August alone.

To be sure, commercial banks are already in the business.

But their role has been limited to funding those holding the Angkasa codes.

Public-listed RCE Capital has made a profitable business out of funding three cooperatives to reach government servants.

Due to the many layers involved, the interest rates on the loans to government employees have historically been high.

But competition among the existing players has driven down rates to an average of 5% to 6% presently.

Still, if commercial banks are allowed in the market, interest rates can be driven down more, considering their lower cost of funds and the lower risk involved due to the banks’ ability to “garnish” the salaries of borrowers.

That, in turn, can lead to existing borrowers migrating to the commercial banks.

And that can spell trouble for existing players.

The status quo, however, is unlikely to be rocked overnight.

The interested commercial banks are believed to be working on building an electronic interface similar to what Angkasa has.

Due to the complexity of such a system, it may take months before it is up and running.

Furthermore, Angkasa is unlikely to open its system up to the newcomers.

Angkasa’s members are the cooperatives involved and they have their rationale for keeping things as they are.

Angkasa vice-president Mustapa Kamal Maulut said: “The profits that Angkasa make are channelled back into society in the form of free training programmes on skill development for cooperative members.

"Opening up the market to other players could hurt Angkasa’s bottom line and hence these activities.”

Another concern is that with cheaper loans available to them, civil servants may be tempted to borrow more.

Former chief executive of Malaysia Building Society, Ahmad Farid Omar, said more checks needed to be in the system to ensure there was no over-borrowing.

“There should be some way of determining that loans should only be given for productive purposes such as buying of land. An unnecessary high debt level among civil servants can lead to all sorts of problems,” he said.

Still, the argument for liberalisation does make sense.

There must be other ways to fund the cooperatives’ social objectives without denying the benefits that a freer market place will bring to the country’s civil servants.

So,companies like RCE will have to view all this new development seriously;so as not to lose too much to these johnny-come-lately banks.