Will Banks Lose RM6.4 Billion During Moratorium?

Banks are expected to lose RM6.4 bil during the loan moratorium between April and Sept, Finance Minister Tengku Zafrul Abdul Aziz said (and quoted by Focus Malaysia).

Banks stood to lose RM1.06 bil a month based on the Malaysian Financial Reporting Standards (MFRS) 9, Zafrul told in his reply to a question from Bagan MP Lim Guan Eng in the Dewan Rakyat.

MFRS 9, the Malaysian equivalent of International Financial Reporting Standard 9 (IFRS 9), requires banks to make provisions in anticipation of a loan turning bad, instead of the previous practice of making provisions only when the loan has soured. As such, banks face the prospect of having to make much higher provisions this year as they take into account loans that could potentially go bad amid the current turmoil caused by the Covid-19 pandemic.

 “Yes, there will likely be a significant uptick in provisions this year, which will ultimately hurt the banks’ earnings,” a banking analyst from a local brokerage says.

Be that as it may, those in the accounting industry think it is unlikely that the banks here will be given a reprieve from MFRS 9.

IFRS 9 was in the first place designed to address the “too little too late” criticism following the 2008/09 global financial crisis that banks were not able to account for losses until they were incurred when it was apparent that they were coming.

Nevertheless, all eyes will be on whether European regulators give in to the banks there, which have only just started to recover from the last global crisis.

Analysts point out that the impact of the pandemic goes beyond the obvious sectors like travel and tourism. It has also indirectly affected many other sectors, particularly oil and gas (O&G) because of the slump in oil prices, and property because of the ensuing slowdown.

Banks will definitely lose under a moratorium of principal repayment and interest. What banks should be willing to consider is the deferment of principal repayment by a year while interest is serviced. Even this could be difficult for SMEs and individuals who have low turnover or lost employment, respectively. In any event, a complete re-assessment of credit risk has to be done. And then perhaps a considered acquisition of identified loans by Bank Negara/Danaharta. That will ensure banks’ capital ratios are intact and remain viable to undertake fresh loans. The question of moral hazard is not relevant if banks have performed the credit rigour in the first instance. This is a better solution for all.

Image: https://www.thestar.com.my

Will banks then lose RM6.4 billion? This is an accounting issue and relief on MFRS 9 is a moot point. But banks have been profitable over the years and any provisioning now could be reversed in the year ahead when conditions improve. Borrowers may also repay in full the arrears due. The Minister seems to be on the bankers’ side when a normal politician will have furthered the interest of the rakyat!

References:

1. Banks Ask For MFRS 9 Relief on Worry of Provision Spike, Adeline P aul Raj, March 30, 2020 https://www.theedgemarkets.com

2. Banks Expected to Lose RM6.4 Bil During Moratorium, Focus Malaysia