Loan Moratorium: Impact on Banks

Introduction

A moratorium is a period during the loan term when the borrower is not required to make any repayment. It aims to help individuals manage their cash flow so that they can fulfil their accrued interest.

In light of the economic recession caused by the global pandemic, the central bank of Malaysia, Bank Negara Malaysia (BNM) announced a 6-month loan moratorium, starting March to September.

What does the Loan Moratorium entail?

The main benefit of the loan moratorium is that it provides an option for borrowers to defer loan repayments. Having this option provides a window of opportunity for borrowers to resolve their cash flow problems that they may have encountered due to the Movement Control Order (MCO). Those who faced cash flow problems during the MCO might be those unemployed, employees who faced pay cuts, and owners of businesses that were badly affected, such as those in the retail and hospitality sector. Opting for the debt moratorium programme will allow them time to recover from any losses of income (e.g. Getting new or multiple jobs, reducing expenditure, business owners seeking new contracts etc.) Nonetheless,  beneficiaries of the loan moratorium are still expected to resolve their cash flow by September. This is because the interest on these loans will continue to accrue on the deferred loan repayments. Therefore, the borrowers will still have to make repayments in the future.

Besides that, for credit card facilities, banking institutions will offer to convert the outstanding balances into a 3-year term loan with reduced interest rates to help borrowers better manage their debt under the loan moratorium programme. This will also help ease the increasing financial burden of individuals affected by the pandemic. 

Current Situation: Possible Extension of the Loan Moratorium Period

The government has been urged by multiple parties such as Malaysian Trades Union Congress, to extend the loan moratorium to aid those whose income has been affected by COVID-19. This is because the MCO period has left a dent in the local economy, thus causing businesses and individuals to face problems in their cash flows.

In fact, the Department of Statistics Malaysia (DOSM) has announced that the unemployment rate has risen to 5.3% with more than 800,000 people unemployed in May 2020. This is expected to increase given that retrenchments filed with the Social Security Organisation’s (Socso) Employment Insurance Scheme rose in May and June. The increasing unemployment rate implies a possible surge in non-performing loans (NPL) when the loan moratorium ends in September.

Department of Statistics Malaysia (DOPM)

The unemployment rate is expected to remain at this level until at least the end of the year. Therefore, extending the loan deferments until December could give financially-affected individuals a little bit more breathing space to resolve their cash flows by then, thus resulting in a lower number of NPLs.

Potential Effects of Extension on Banks

Due to the rising unemployment levels, banks are faced with a difficult decision, whether or not to prolong the loan moratorium for a further 3 months. By agreeing to extend the moratorium period, the bank’s cash flow will be impacted as collecting interest on loans is one of the main ways for banks to generate revenue. If the revenue of banks falls drastically, especially for a prolonged period, the banks might encounter some liquidity issues. If the bank has a good cash pile set aside for emergencies, it is likely able to sustain through this economic, financial storm. However, smaller banks with a lower cash buffer might suffer more and face the possibility of insolvency. 

What happens if the Loan Moratorium period is Not Extended?

Deferred loan/financing repayments under the moratorium are estimated to have reached RM55.2 billion as of July 13, signalling a worrying amount of loans at risk of default. If banks refuse to extend the moratorium, we might see a spike in NPLs as the labour market has not yet recovered to pre-COVID-19 levels due to the rising unemployment levels. In this case, banks will still take a hit, depending on how high the NPLs spike will be. 

US credit-rating agency Moody’s Investor Service mentioned that the debt moratorium will soften the near-term, credit-negative impact on the banks’ asset quality which will lead to higher credit losses after the moratorium is lifted. Asset quality of banks is basically the quality of loans, and credit losses really mean losses that are caused by customers not paying the money they owe. In short, Moody’s thinks that the number of people unable to pay back their loans will increase after the loan moratorium period. 

Banks’ Response to the Possible Extension

Maybank has said that it will not consider an extension of the moratorium, as it believes that a six-month period is good enough for consumers to come up with a plan on how to finance their respective loans, post-moratorium.      

In a news article on the 30th of June by the New Straits Times, more than 70% of Maybank’s loan book is currently under the moratorium, relief or rescheduling and restructuring programmes. Maybank had also previously announced that there would be a Day-One modification loss for fixed-rate financing assumptions, resulting from the moratorium of hire purchase loans, which could amount to RM1 billion. 

Maybank group president and chief executive officer Datuk Abdul Farid Alias said that around 88% of Maybank’s small and medium enterprise (SME) outstanding loans are under the six-month moratorium. 

Given the bulk of Maybank’s loan book is currently under the moratorium, the extension of the moratorium will have a major impact on the bank’s cash flow.

Meanwhile, CIMB has decided to adopt a slightly different approach. The group said that it will take a target assistance approach, a strategy also advocated by Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz. Recently appointed CIMB group chief executive officer Datuk Abdul Rahman Ahmad said the bank would engage borrowers from the hardest-hit sectors to extend support and restructure terms where necessary, in an article published by New Straits Times. Sectors severely affected by the pandemic may include hospitality, retail, travel etc.

AMBank’s response will be similar. Group CEO Datuk Sulaiman Tahir says at this juncture, the lender believes that it would “be best for the moratorium to end in September”. He said that once the moratorium comes to an end, there could be more targeted and incisive programmes aimed at supporting the B40 segment and for those in the M40 segment who are in need. He also believes that given the current unprecedented economic environment, it is inevitable that NPLs will increase across the banking sector. 

Conclusion

The 6-month loan moratorium has provided the much-needed room for borrowers to restructure their loans as well as recover their cash flows. Although banks are adamant in their belief that extending the loan moratorium period is not an option for them, they are willing to help several groups of people in the hard-hit sectors. Borrowers are advised to communicate with their own banks to form an arrangement regarding their loan structure before September. As the coronavirus outbreak lessens and with Malaysians getting used to the new norm, there is hope that our country will be back where it once was before the pandemic.


Writer: Dexter Neo 

Reviewers: Yang Ler Lee, Millen Lau

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