An automatic loan moratorium from banks is critical at this juncture to help individuals and small businesses survive the ongoing lockdown, an independent research house said as the government today announced a further extension of the movement control order (MCO).
“The danger of massive loan defaults if the moratorium is not granted might be more real than we think,” said Emir Research in arguing the case for a blanket loan moratorium similar to the one announced by the government last year.
The think tank also disagreed with Finance Minister Tengku Zafrul Aziz’s reasoning that most borrowers are back on stable financial footing based on the fact that 85% of them had resumed repayments instead of opting to extend the six-month blanket moratorium when it ended in September last year.
It said it was “precisely because loan moratoriums helped them keep their incomes” that most borrowers were able to resume payments.
“In the absence of a moratorium, or focusing only on the 15% defaulters means the total number of defaulters may increase anywhere between 15% and 85%. The 15% figure means 15% of borrowers are in a bad enough position that not even moratoriums could help them survive. If anything, they need more assistance,” it said in an article explaining why an automatic moratorium should be announced.
Putrajaya had said after the reimplementation of a full lockdown this month that banks would give a three-month moratorium on loans upon request by borrowers in the B40 group and those who had lost their income due to the pandemic.
The move was short of the blanket moratorium announced during the first MCO last year, when an automatic six-month freeze on repayments as well as an interest waiver were declared.
Zafrul had defended the government’s reluctance to direct banks to provide similar relief this time around, saying most borrowers were better positioned to repay their loans than they had been last year.
The move sparked a debate on the power of the finance minister over banks, as well as criticism by those who said that the finance minister was pandering to the bank industry.
But as the deadline neared for revising the full MCO, Zafrul had indicated that the government could rethink its decision on an automatic moratorium, saying he had discussed the matter with the prime minister and the relevant agencies.
“The government listens to the voice of the people and reasonable assistance will be announced in the near future, Insha Allah,” Zafrul said yesterday.
Emir Research said it was difficult to pinpoint why many had chosen not to extend the loan moratorium beyond the six-month period last year.
“Could it be that the 85% have cash flow difficulties too? It’s just that the difference between 85% and 15% is the period (or inter-temporal capacity) over which the cash flow can last. That is, for the 85%, it’s only the case that their cash flow can stretch over a slightly longer period,” it said in the article penned by its CEO Rais Hussin and fellow researchers Margarita Peredaryenko, Jason Loh and Ameen Kamal.
“Has anyone asked what it would take for the 85% to resume their payments?
“Maybe they had to go to a pawn shop, or withdraw their EPF savings, or go to loan sharks, or sell some of their assets, or do other things detrimental to their well-being and human dignity.
“And did anyone even wonder how bad the situation is for the 15% who could not resume payments and what happened to them afterwards?” they added.
They said a blanket moratorium was not only needed but would be “faster and easier to implement” as it could provide a safety net “wide enough to capture all those in dire need, including the informal economic sector”.
“And if this wide safety net captures a few ‘free rides’ (those who do not need a moratorium but enjoy the benefits of one), then let it be – we know those are very few compared to the majority who suffer,” said Emir Research, describing a blanket moratorium at this juncture as a “win-win scenario”.
“Maybe for once, at least under the unprecedented circumstances threatening us all as a nation, the notorious value of profit as the be-all and end-all could give way to the universal value of life – the value of our lives and the lives of others.”
Meanwhile, the think tank said a distinction should be made between a suspension of loan repayments and a “real moratorium”.
“It is worth mentioning, a real moratorium that assists borrowers should have no room for the practice of charging borrowers an additional interest for the period of moratorium by re-amortising the loan payment schedule once the moratorium period is over.”
It said genuine relief would mean a mere postponement of repayments, adding that banks would not lose profits as long as borrowers resume and finish all payments according to schedule.
It said what banks would undergo would be accounting losses due to a re-evaluation of their outstanding loans.
“Under the International Financial Reporting Standards (IFRS 9), the banks have to show the fair value of the loans in their books based on the present value (PV) formula. Therefore, the fair value of the outstanding loans will reduce due to the newly extended period by the moratorium,” said Emir Research.
It said banks in the present financial crisis have very limited opportunity cost, with loan loss coverage – or the allowance for potential loan defaults – increasing last year to 140% compared to 90% in 2019.
“That is to say, there may not be enough credit-worthy customers out there that would qualify under the banks’ stringent requirements for new loans, anyway,” it added.
It noted that in the first quarter of this year, banks’ businesses had quickly recovered, citing examples of profits by three commercial banks: Maybank (RM2.43 billion), Hong Leong Bank (RM772 million) and RHB (RM651 million).
“Keep in mind that these figures were still generated within the time where almost all borrowers took up the opt-in moratorium,” it added.
Emir Research said this points to a moral duty for the banking sector to accept reduced profits as opposed to “losses”, in sharing the burden of the pandemic.
“A relative reduction in profits to the banks attributable to the moratoriums is incomparable to the relative socio-economic harm to the people in the absence of a moratorium, especially during lockdowns,” it said.