Loan moratorium from automatic to targeted approach

By Lee Heng Guie

IN recent weeks, there have been increasing calls from various parties requesting the Ministry of Finance, Bank Negara Malaysia and financial institutions to consider extending automatic loan repayment moratorium as the six-months (April to September) moratorium period will expire in September.

Individuals and business borrowers have asked for further extension of loan moratorium on compassionate grounds so that they have more months of cash flow buffer to tide over as some are still facing liquidity squeeze to service debt obligations.

The Associated Chinese Chambers of Commerce and Industry Malaysia’s (ACCCIM) Malaysia’s Business and Economic Conditions Survey (M-BECS) for the first half of 2020 (1H20) indicated that 37% of total respondents have less than three months of sufficient cash flow to cover business operations/productions, raw materials/inventory and manpower while 42% of total respondents have three to six months’ cash flow. Around 42% of respondents have less than three months cash flow to cover debt/financing obligation, 45.7% need an additional six months of loan moratorium while 20.7% ask for an additional three months.

Automatic loan moratorium is the first financial relief ever granted by financial institutions to ease cash flow squeeze on households and businesses. It was not implemented during the 1997-98 Asian financial crisis despite the severity of the economic and financial crisis. But, the nature of the Covid-19 pandemic is much more extraordinary as it has caused a “sudden stop” in almost all economic activities due to the movement control order (MCO), and the consequential supply and demand shocks had resulted in income and jobs losses. Hence, the loan moratorium is granted to provide a temporary relief for those affected so that they will not be hard pressed to meet their debt payment. In short, loan deferment or forbearance provides a temporary relief for borrowers in a short-term financial bind.

As of July 13, the total loan moratorium amounted to RM55.2 bil (RM35.9 bil or 65% of total for individuals and RM19.3 bil or 35% for businesses). Almost 90% of total borrowers have opted in for loan repayment. Prior to the loan moratorium starting April, the average monthly loan repayment was RM102.4 bil per month in January to March 2020. It was observed that both savings and fixed deposits have increased by RM9.6 bil in April and RM6.1 bil in May respectively on a month-on-month basis. This may indicate that some have saved the deferred loan moratorium for precautionary and contingency purpose.

In times of economic uncertainties, individuals and businesses tend rushing to the safe side. Even though some moratorium seekers are not really facing financial difficulties or prospects of pay cuts, their fear of losing their job or facing a pay cut led them to opt for relief before such eventuality actually happens. This happened during the height of the MCO as uncertainty surrounding salary cuts and job losses has prompted many to conserve cash.

For borrowers, it is critical to proactively exercise the right choice. For someone not facing any cash flow issues, moratorium is of no benefit but rather is an unwanted burden. Why pay more accrued interest when you can service your debt obligations today?

Borrowers who have opted in should prudently manage the “extra money” from the deferment of loan repayment so that it can be drawn down later to meet debt payment when the loan moratorium expires. While some can be used to ease cash flow squeeze during the MCO period, some of the money should be set aside for usage post the ending of loan moratorium.

After the ending of an automatic loan moratorium, we expect that the financial institutions will continue to assist borrowers really in need or facing financial difficulties to restructure their financial commitments. This targeted loan moratorium approach, or rather an automatic blanket moratorium, serves to ensure that such financial relief would be considered for the needy and vulnerable facing cash flow crunch due to layoffs, large pay cuts and are employed in sectors that suffered the hardest hit from the pandemic.

The flexible repayment programmes or loan restructuring could take the form of renegotiated terms (maturity, interest rates, fees), grace periods or payment deferrals. The options include restructuring the original amount of monthly loan repayments, lengthening the repayment period, and stepping up the loan instalment. With the interest rate (as benchmarked by the Overnight Policy Rate) has been lowered by 125 basis points this year, this helps to ease debt-service payments on existing loans for highly leveraged borrowers.

Borrowers can receive counselling and advice on managing their debt from Agensi Kaunselling dan Pengurusan Kredit (AKPK) or the Credit Counselling and Debt Management Agency to help them to identify and clarify options that are available to improve their financial situation. This involves negotiating with banks on behalf of borrowers, and upon agreement, developing a personalised debt repayment plan for individuals who are unable to manage their monthly repayments to banks.

Financially distressed borrowers are advised to make an early preparation in terms of being operationally, financially and mentally prepared to meet obligations by engaging with their bankers and also to seek AKPK’s advice and assistance in crafting out a suitable loan repayment plan.

In balancing between preserving banking system soundness, financial stability and supporting economic recovery, it is important that the provision of financial relief to assist distressed borrowers is to be made transparent, targeted and clearly temporary. This is not to create moral hazard and foster poor credit risk management practices, which may precipitate further credit crunch. The targeted loan moratorium approach would allow the banks to work constructively with affected borrowers and undertake prudent loan restructuring based on the borrower’s capacity to pay while freeing some cash flow for the banks to continue lending. – July 20, 2020

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