Wednesday, 6 May 2020

Of Moratorium, Waiver and Zero Interest

A moratorium (period) typically refers to a period of a loan tenure in which the borrower does not repay anything. It may be described as a “waiting period” or “holiday” before the borrower may start paying equated monthly instalments for his/her loan.

A loan waiver on the other hand, is the waiving of real or potential liability of the person or party. This is through the voluntary action of the party who made the loan. In the U.S. and India there are cases of such waivers. The Government usually bears the cost. It could be implemented for a specific period instead of the entire period or sum.

Zero interest is a method of stimulating economic growth while keeping interest rates close to zero. Japan has used zero interest rate policy since the 1990s. The drawback is the economy fell into a liquidity trap – a situation where people don’t spend or invest even when interest rates are low. Basically, there is no demand. 

 Source: Wall Street Mojo

On 30th April 2020, the Association of Banks in Malaysia (“ABM”) said that those who wish to take up the moratorium were now required to formally confirm with their respective banks. The moratorium period is from April 1 to September 30, 2020.

Those who take up the moratorium have three options:

1.    Pay the accumulated six months deferred instalments together with their October instalment without being charged additional interest; or
2.    Continue the repayment of these instalments post-October of 2020 with an extension of six months in repayment period after the original maturity date; or
3.     Continue paying the instalments, according to original schedule, i.e. no moratorium.

The third option is not an option but status quo. The first (option) seems rather bizarre, where a borrower suddenly has funds in October to pay all previous instalments and that for October. Is the economy “red-hot” by October? Are we missing something?

The only real option is option 2, where the period is extended from the original maturity period. Hopefully, there are no penalties or additional interest.

The other possibility is to look at interest waiver for SMEs for a limited period, say six months, with principal deferment of 12 months. Interest waiver will cost the banks, unless the Government steps in.

Banking institutions is the main source of financing for SMEs, providing more than 90% of total financing. More than RM 300 billion is outstanding loans to SMEs. If interest rate is 5%, interest income for banks is probably RM 7.5 billion semi-annually – that is a hefty sum from the banking industry’s perspective. But generally, the major banks have been reporting pre-tax profits of RM 4 billion and above over the last several years. And who “saved” the banks in the Asian Financial Crisis of 1998/2000? Taxpayers! It is time for bankers to assist SMEs and others!

Zero interest rate for SMEs is another option. Again, the ramifications could be similar, but this is a policy rather than a procedural issue.

Anyway, SMEs need help in this Covid-19 pandemic and the framework that is in place right now is as follows: -

 Source: Bank Negara Malaysia

1.   Banks to explain six-month loan moratorium to hire-purchase customers by Chow Zhi En, Star Newspaper, Thursday, 30th April 2020.
2.     Financing for SMEs, Bank Negara Malaysia.
3.     Access to Finance, Chapter 6.1, SME Corporation.

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