Thursday, 2 July 2020

Moratorium or No Moratorium?


Malaysia’s Finance Minister was reported as saying that borrowers should speak to their banks to request for an extension of the present moratorium which ends on 30 September 2020. “It is really up to them”, according to the Minister. Malayan Banking Berhad said on Friday, 26 June 2020 that it would not be extending the six-month loan moratorium period.

So much for “breathing space”. Many businesses (esp. SMEs) will go on “ventilators” or be “buried” in liquidation. Who rescued the banks in 1997 and 2008? The taxpayer! And then they made RM4 billion a year or more in net profit.

About 60% of SMEs did not have sales for 3 months, at least, due to the MCO. That’s according to Datuk Michael Kang, President of SME Association of Malaysia. Many see a pick-up by end of this year or early next year. So another six months moratorium will certainly help. And that cannot be done unless Bank Negara Malaysia (“BNM”) acts.

For banks, it is helpful to be transparent. What is the proportion of loans that are under moratorium? We need data to assess if banks are truly impacted by the moratorium. In India, it is between 30% to 70% of loans for different banks that have extended moratorium. Extension on the moratorium on term loan instalment is a major relief to borrowers facing liquidity issues. This is not a loan waiver (or forgiveness!). It just gives SMEs some extra time to repay their debt. Credit scores should not be adversely affected nor impairments be considered. Where companies cannot even meet interest obligations, then it is “rolled-up” to be repaid at a later date.

Banks have to take a more proactive stance and workout potential “problem” loans now then later. Moody’s Investors Service is of the view that the risk of credit loss will increase substantially if economic downturn and measures to contain the spread of the pandemic persists longer. Banks have robust capital adequacy and liquidity even in these circumstances.  Yes, profitability will decline but this is for a year or two. And isn’t it better to save viable businesses that could be providing future revenue streams for the banks?

So, it makes sense to extend moratorium on principal repayment (for term loans) by another six months to March 2021. Interest, perhaps, could continue to be serviced by the SMEs. It requires leadership from BNM, not just leaving it to individual banks to decide.

References:
1. Businesses Need Breathing Space, Rashvinjeet Bedi and Hanis Zainal, The Star, 1 July 2020
2. Explained: What RBI’s Extension of Loan Moratorium Means, Sunny Verma (www.indianexpress.com)
3. Coronavirus Impact: Loan Moratorium May Lead to Greater Build-up of Credit Losses for Banks, says Moody’s, 21 April 2020 (www.sakaltimes.com)


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