Backlash over moratorium announcement

Starting May 1, borrowers/customers will be receiving a notification on the necessary steps they need to take

by ASILA JALIL/ pic by RAZAK GHAZALI

BANK Negara Malaysia (BNM) came under fire last weekend following certain “revisions” that were made on the six-month moratorium on loan and financing repayments, which was earlier announced to cushion consumers’ financial woes as a result of the global Covid-19 pandemic.

In a press release last week, the central bank stated that banking institutions are in the process of formalising agreements on revised payment terms with their customers with hire-purchase (HP) loans and fixed-rate Islamic financing to give effect to the six-month moratorium.

It said the measure was to comply with the procedural requirements under the HP Act 1967 and Shariah requirements applicable to any changes made to the terms of the initial agreements, which includes changes to the payment schedules and/or amount as a result of the moratorium.

“Starting from May 1, 2020, borrowers/customers with HP loans and fixed rate Islamic financing will be receiving a notification via SMS, email or registered mail from their banking institutions on the necessary steps that they need to take to complete the process of deferring their loan/financing payments under the moratorium.

“Banking institutions will also provide each borrower/customer specific details of changes to the terms of his/her HP loan or fixed-rate Islamic financing agreement. This should contain information on the revised payment schedule and any changes to payment amounts, including those arising from normal interest/profit rate accrued during the moratorium,” it said.

The announcement drew anger and confusion from the public who claimed that the central bank has back-pedalled from its first announcement on the moratorium, which was made on March 25, regarding accrued interest rates or profit.

Confusion arose as many thought they would not be charged with additional interest during the repayment period after the moratorium.

Following the backlash and claims on an alleged “U-turn”, BNM stressed that it has previously clarified that interest/profit will continue to accrue on loan/ financing repayments during the moratorium period.

In its latest frequently-asked question (FAQ), the central bank said the payment deferment for HP and fixed rate Islamic financing is still automatic.

However, an additional step is now needed to comply with procedural requirements under the HP Act and Shariah requirements.

“The confusion arises because of the perception that under the HP loan, the amount repaid cannot be changed. This misperception also arose to some extent from our earlier illustration where we made certain assumptions and caveats.

“We removed this example from BNM’s FAQs when banks provided their own illustrations in their FAQs. BNM’s illustration was not intended to preclude interest/profit rates to accrue over the deferment period,” it said in the FAQ published on May 1.

BNM also acknowledged the confusion and regretted its occurrence due to the announcement made, adding that the deferment package was first announced to ease cashflow for borrowers and customers who are affected by the Covid-19 pandemic, and the intent remains.

Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz then urged financial institutions to abolish the accrued interest on HP loans and profit on fixed-rate Islamic financing loans during the moratorium period.

The Ministry of Finance has also said it will take proactive measures to resolve the matter together with BNM and the banking institutions.

In a research note yesterday, Affin Hwang Investment Bank Bhd stated that banking institutions would have to take a larger impact of a “modification loss” on their respective income statements if they waive the interest/profit charges.

“A ‘modification loss’ is defined as the difference in the gross carrying amount of a loan (or financial asset) based on the difference between the present value (PV) of the modified contractual cashflows (discounted at the loan’s original effective interest rate) vis-à-vis the PV of the original contractual cashflows before any modification to the terms of the loan (involving extension of contract, interest waived, payment holiday),” it said.

It also maintained its ‘Underweight’ call for the banking sector as it projects a “deterioration in earnings”, and additional measures by BNM have put further pressure on banks’ liquidity and funding.

It added that non-performing loans will also spike if the pandemic prolongs.

“At this juncture, we foresee a decline in sector core earnings per share of 20.8% year-on-year (YoY) in 2020, and a modest growth rate of 1.8% YoY in 2021,” it said.