In recent weeks, there were increasing calls from various parties requesting the Ministry of Finance, Bank Negara Malaysia and financial institutions to consider extending the automatic loan repayment moratorium as the six-month (April-Sept) moratorium period will expire in September.
The Associated Chinese Chambers of Commerce and Industry Malaysia (ACCCIM) Malaysia Business and Economic Conditions Survey (M-BECS) for 1H 2020 indicated that 37% of total respondents have less than three months cash flow to cover business operations/productions, raw materials/inventory and manpower while 42% of total respondents having 3-6 months cash flow. 42% of respondents have less than three months’ cash flow to cover debt/financing obligation. Up to 45.7% of total respondents need an additional six months of loan moratorium while 20.7% are asking for an additional three months.
Total Loan Moratorium
As of July 13, the total loan moratorium amounted to RM55.2 billion (RM35.9 billion or 65% of total for individuals and RM19.3 billion or 35% for businesses). Almost 90% of total borrowers have opted for loan repayment. It was observed that both savings and fixed deposits increased by RM9.6 billion in April and RM6.1 billion in May respectively on a month-on-month basis. This may indicate that some have saved the deferred loan moratorium for precautionary and contingency purposes.
In times of economic uncertainty, individuals and businesses tend to rush to the safe side. Even though some moratorium seekers are not really facing financial difficulties or prospects of pay cuts, their fear of losing the job or facing a pay cut have made them opt for relief before such eventuality actually happens. This happened during the height of the MCO (Movement Control Order) period as uncertainty surrounding salary cuts and job losses prompted many to choose 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 is rather an unwanted burden. Why pay more accrued interest when you can service your debt obligations today?
Borrowers who have opted 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 the loan moratorium.
Restructuring Financial Commitments
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, rather than an automatic blanket moratorium, serves to ensure that such financial relief would be considered for the needy and vulnerable ones really facing a cash flow crunch due to layoffs; large pay cuts; and employed in sectors that suffered the hardest 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 repayment; lengthening the repayment period; stepping up loan instalment, etc. With the interest rate (as benchmarked by the Overnight Policy Rate) has been lowered by 125 bps 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.
Financial distress borrowers are advised to make early preparation in terms of being operationally, financially and mentally prepared to meet obligations by engaging with their bankers and also seek AKPK’s advisory 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.
Lee Heng Guie is Executive Director of Socio-Economic Research Centre (SERC), an independent and non-profit think tank.
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