Extension of loan moratorium will hurt banks’ financials

While banks could still accrue the interest, liquidity could be an issue since there is no repayment during a loan moratorium, says researcher


A BLANKET extension of the six-month loan moratorium to the end of the year as called for by certain parties could impact the banking institutions’ monetary status and prove futile for the economic recovery of the country.

MIDF Amanah Investment Bank Bhd (MIDF Research) head of research Imran Yassin Mohd Yusof said it will not be fair to impose a blanket extension of the loan moratorium as every individual is affected differently by the Movement Control Order (MCO) and the Covid-19 pandemic altogether.

“At the current juncture, we do not believe there will be a blanket extension to the loan moratorium.

“We must also bear in mind the effects of a blanket extension of the loan moratorium on banks’ financial health. While banks could still accrue the interest, liquidity could be an issue since there is no repayment during a loan moratorium,” he told The Malaysian Reserve (TMR) recently.

Liquidity issues would push banks to be more cautious in lending, said Imran Yassin, which will lead to difficulties for businesses to get loans and for consumers to purchase big-ticket items.

These problems would further hamper the economic recovery in the country, he said.

“At the moment, we believe the stance taken, which is the targeted assistance, is the best course of action. In terms of the Overnight Policy Rate (OPR), we are maintaining our view that there will be no more rate cuts this year,” added Imran Yassin.

Institute for Democracy and Economic Affairs senior fellow and Centre for Market Education CEO Dr Carmelo Ferlito said the targeted loan assistance programme offered by banks post moratorium remains the best approach in helping those affected by the MCO.

“I think a targeted approach remains the golden rule, in order to balance among the different situations of many banks and the variegated scenario of the borrowers.

“A uniform policy could damage some banks more than others or keep on life support bad loans. So we need to allow a certain flexibility in the banking system,” he told TMR.

He added that the damage towards the economy and individuals stemmed from the MCO which has led to job losses and pay cuts, leading to a dip in the country’s overall growth.

He suggested among the measures that can positively impact the economy is to reopen borders for business purposes which could spur economic growth.

“The only other measure that can have an impact on the economy now is an Asean strategy to reopen borders at least for business travellers,” said Ferlito.

Bank Negara Malaysia (BNM) granted an automatic loan moratorium on loan repayments for small and medium enterprises (SMEs) and individuals from April until Sept 30, 2020.

It then announced that an additional targeted assistance for borrowers would be provided after the moratorium expired. The assistance targeted individuals who were retrenched and unemployed, and employees who took pay cuts and are looking into reducing loan instalments.

The central bank recently said around 500,000 applications for repayment assistance have been received with an approval rate of 98%.

Kenanga Research said the figure translates to a take-up rate of 6% of individuals and SMEs borrowers that were under the blanket loan moratorium and much lower compared to BNM’s forecast of three million borrowers that would take on the targeted assistance.

Banks had generally shared in August that around 10%-15% of loans might require some assistance post end-September, with CIMB Group Holdings Bhd having guided the highest proportion of 20%-30%.

“To date, we understand the proportion of borrowers requiring further assistance has been lower than expected. We expect applications for repayment assistance to continue in the coming months and the overall rescheduling and restructuring (R&R) proportion to rise, but given the low take-up rate thus far, it appears likely the final proportion would be lower than the 10%-15% of loans that was previously expected (assuming no nationwide lockdown ahead).

“These R&R loans are not expected to be staged just yet and hence, asset quality should stay relatively intact for now. Nevertheless, we expect the banks to continue booking in preemptive provisions and building up loan loss reserves in anticipation of asset quality slippage that is expected to be delayed to 2021,” its analyst David Chong stated in a note recently.

The firm also forecasts the sector’s net profit to fall by 26% year-on-year in 2020 underpinned by 17 basis points (bps) net interest margin compressions due to modification losses and OPR cuts, as well as higher sector credit cost of 71bps compared to 27bps in 2019.

“Our estimates suggest banks will need to look beyond 2021 before net profit can recover to 2019 levels.”