KUALA LUMPUR: Non-bank financial institutions' (NBFIs) assets grew 67.4 per cent over the past decade, hitting RM3.3 trillion last year from RM2 trillion in 2013, said Bank Negara Malaysia.

The central bank, in its Financial Stability Review for the second half of 2023, said NBFI assets as a share of total financial system assets had correspondingly increased from 38.1 per cent to 49.9 per cent.

Of this, close to half is held by development financial institutions (DFIs), insurers and takaful operators (ITOs), and investment funds that are regulated by Bank Negara or the Securities Commission.

Pension and provident funds form the bulk of the remaining share of NBFI assets.

The structural composition of the sector has been relatively stable over the past decade.

Such funds are subject to specific laws, regulations or guidelines issued by the government or regulatory authorities that govern their management and operations.

Globally, NBFIs' financial assets had more than doubled since 2008, reaching US$218 trillion as at 2022.

The interlinkages between the NBFI sector and the rest of the financial system have deepened, in line with the growing significance of NBFIs in the economy, which presents new channels of propagation of financial stress.

Other non-bank credit intermediaries (such as cooperatives, moneylenders, pawnbrokers, leasing and factoring companies, non-bank providers of housing loans, hire purchase and student loans) account for a smaller share (10.9 per cent) of NBFI assets.

Lending by these non-bank credit intermediaries is extended to individual borrowers and typically funded via bank loans and capital market or government grants, with limited maturity transformation.

Their share of credit was at 12.2 per cent of total credit to households, with the balance intermediated by traditional banks.

"The share of total financial system assets of these entities has remained stable over the years, with generally modest credit expansion observed, consistent with their niche target markets.

"While some of these non-bank credit intermediaries are currently unregulated, the impending enactment of the Consumer Credit Act will pave the way for the establishment of the Consumer Credit Oversight Board as an independent competent authority to oversee consumer credit providers and credit service providers.

NBFIs hold a substantial stake in banks, accounting for 36.1 per cent of the total listed equity of banks.

This increases the potential for strains from the NBFI sector to spill over to the broader banking system, and vice versa, through financial and reputational channels.

Dividends distributed by banks are also an important source of income for several large NBFIs.

A significant fall in the profitability of banks could adversely impact the financial performance of these NBFIs and ultimately, household savings held with NBFIs.

This in turn could create negative feedback loops to the banking system and broader economy.

NBFIs are also large depositors in the banking system, with deposits concentrated in individual banks.

For some banks, NBFI deposits account for as much as 17 per cent of their deposit base.

As such, large unplanned withdrawals by NBFIs, particularly in response to sudden liquidity needs, could result in subsequent liquidity strains on banks. During the Covid-19 pandemic, the implementation of relief measures led to large deposit withdrawals by some NBFIs to meet an unexpected demand for liquidity.

While their participation in the financial markets provides stability and depth to these markets, any large-scale disposal of these assets by NBFIs under stressed conditions could significantly depress asset prices.

This could subsequently affect the balance sheets of banks with similar asset holdings, presenting indirect contagion risks from NBFIs to the banking system.

Based on the liquidity profiles of key NBFIs, in the event of sustained stressed outflows faced by them that lead to a fire sale of their government bonds and an associated increase in bond yields by up to 53.5 basis points, the subsequent contagion risk to banks' solvency is assessed to be minimal.

Results from the simulation show that the banking system's total capital ratio as at December last year may decline from 18.5 per cent to 18.1 per cent post-simulation.

https://www.nst.com.my/business/economy/2024/03/1029349/non-bank-financial-institutions-assets-have-surged-rm33tril-over