Is It Good News on Loan Repayments?

The Edge (Joyce Goh) on October 15 reported that Bank Negara Malaysia (BNM) data showed that the total value of loan repayments had reached 70% of what it was prior to the blanket loan moratorium period.  

“Many borrowers are starting to repay their loans,” BNM deputy governor Jessica Chew told the media in a virtual briefing on October 14.

BNM data revealed that two million borrowers had been engaged by banks by the end of September, out of which 514,000 were R&R (rescheduling and restructuring) applications received with a 98% approval rate.

For businesses, banks approved 6.3 times applications compared to total outstanding R&R loans at the end of 2019.

Chew reiterated that a targeted repayment assistance measure is more suitable going forward as it would continue to extend temporary relief to borrowers that may still face challenges, while also improving visibility of loan performance of banks, which she believes is necessary to encourage and support an economic recovery.

At the start of the blanket moratorium period, more than 95% of individuals and small and medium enterprise (SME) borrowers took up automatic repayment deferment, according to BNM’s latest Financial Stability Review (FSR) report for the first half of 2020 (1H20).

The regulator observed that more borrowers started to resume their loan repayments in recent months as their income and employment prospects became clearer (see chart). Or, they had to service their interest on loans while principal payments are deferred. That’s the R&R for most companies.

“With the automatic moratorium in place, aggregate impairment and delinquency ratios remained low at 1% and 0.9% of total outstanding household debt respectively (2019: 1.2% and 1.1%). Household asset quality is expected to see some deterioration in 2H20 and throughout 2021 with the automatic moratorium ended, but banks are well positioned to absorb higher credit losses,” it (BNM) added.

BNM said the automatic loan moratorium had provided many households with immediate temporary financial relief, particularly those who lost their jobs and were experiencing income declines.

“At its peak, close to 90% of household borrowers with about 87% of outstanding household loans in the banking system were under the moratorium as most borrowers elected to defer their loan repayments to secure greater flexibility in managing their cash flows during a highly uncertain period,” it said.

Based on the enhanced financial margin framework, BNM estimated that household borrowers who may experience difficulties (such as those with negative financial margins) in servicing their debt as a result of income and unemployment shocks are unlikely to account for more than 15% of total borrowers.

Among these borrowers, about 1% of total borrowers with 3% of outstanding household debt are expected to default after accounting for financial buffers held and targeted repayment assistance extended to borrowers in need.

BNM also noted that about 40% of potential defaults arise from housing debt with an average loan-to-value (LTV) ratio of 70%, thus limiting financial exposure of affected borrowers and losses for the banking system.

In the FSR report, the regulator noted that household loan impairments are projected to double — albeit from historically low levels.

Higher household impairments are expected to emerge in 2H21 given the extended repayment assistance programmes that will remain in place through the first quarter of 2021 (1Q21) for individuals who have experienced a loss in income, it added.

It would be useful if BNM could share its anticipation of loan impairments under MFRS 9. A breakdown of loans under Stages 1-3 within the expected credit loss (“ECL”) model will provide how things may go “south” but improve in 2021 or 2022. If the majority of borrowers (95%) took up the blanket moratorium in April 2020 (to September 2020), how come they are ready to repay in October 2020?

Banks are prepared to do R&R now if and when you apply but largely on the principal sum being deferred. Not on interest. Some businesses cannot service even interest. Then what? Shut the business. That’s what CMCO is now doing for those retail outlets who are suffering from 50-60% drop in daily revenue. Most of the Covid-19 cases are in Sabah (80%), while KL and Putrajaya are under CMCO with less than 10 cases a day.

What’s my point? If you do CMCO or TEMCO or MCO then please provide a minimum moratorium period of three months. Otherwise, we are in “la-la” land.

 

Reference:

Joyce Goh, Total value of loan repayments reached 70% of pre-moratorium levels — BNM, 15 October 2020, TheEdge CEO Morning Brief