The Association of Banks in Malaysia
(updated 03 December 2020)
INFORMATION YOU NEED TO KNOW ABOUT DEFERMENT OF LOAN REPAYMENTS AND THE PERIOD AFTERThe Malaysian banking sector is stepping up measures to offer relief to help its borrowers adversely affected by the COVID-19 pandemic, to support economic recovery and safeguard the livelihood of Malaysians. Here are the measures that have been implemented to-date since the Movement Control Order (MCO):-
- Deferment of Loan Repayments (Blanket Moratorium)
25 March 2020 - BNM had announced a number of regulatory and supervisory measures in support of efforts by banking institutions to assist individuals, small and medium-sized enterprises (SMEs) and corporations to manage the impact of the COVID-19 outbreak. These measures allow banking institutions to remain focused on supporting the economy during these exceptional and unprecedented circumstances, by providing flexibilities for banking institutions to respond swiftly to the needs of their borrowers. Amongst others, the deferment of all loan repayments for a period of 6 months, with effect from 1 April 2020. This offer is applicable to performing loans, denominated in Malaysian Ringgit, that have not been in arrears for more than 90 days as at 1 April 2020. For credit card facilities, banking institutions will offer to convert the outstanding balances into a 3-year term loan with reduced interest rates to help borrowers better manage their debt1. The deferment targets only deserving borrowers who may be challenged financially in the short-term. Thus the blanket moratorium to be granted is not for those who have already defaulted before the COVID-19 impact and took advantage of the same.
In the current context, it is a temporary deferment or suspension of loan payment obligation (principal and interest) for a limited period of time, not a waiver. During this period, borrowers with loan that meet the eligibility conditions do not need to make any payment, and no late payment charges will be imposed. Borrowers will need to honour the deferred payments in the future as loan/financing repayment resumes after the deferment period.
The blanket moratorium is meant to ease cash flows for borrowers who are affected by the COVID-19 pandemic. This is to help individuals and businesses facing financial adversities cope with challenges during this period. As highlighted in BNM’s announcement on 25 March, borrowers were advised that interest will continue to accrue on deferred payments and they should consider this in deciding whether they wish to take up the moratorium as borrowers will need to honour the deferred repayments in the future1. Borrowers have been advised to ensure that they understand and discuss with their banking institutions on the options available to resume their scheduled repayments after the deferment period.
Thus far, Malaysia has been the only country in the world to implement an automatic moratorium for 6 months from April 2020 for the benefit of individuals and SMEs during the enforcement of the MCO to combat the spread of COVID-192. For Malaysia, all individuals and SME/loan financing that meet the stipulated criteria will automatically qualify for the deferment. According to Moody’s Investors Service, Malaysia offered the most extensive loan moratorium in South-East Asia, covering about 80 per cent of total loans3. Under the 24th report by the Economic Stimulus Implementation & Coordination Unit Between National Agencies (LAKSANA), Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz said that the value of the moratorium as of 25 September 2020 is estimated at RM97.26 billion. Out of this figure, a total of RM34.04 billion was utilised by the business sector while RM63.22 billion was utilised by the Rakyat4. Overall, the moratorium has benefited more than 7.7 million Malaysians, comprising 93 per cent of individual borrowers as well as 243,000 businesses or 95 per cent small and medium enterprise5.
Financial institutions (FIs) worldwide including Malaysia have been proactive in responding to the needs of their borrowers with various rescheduling and restructuring initiatives offered to assist affected borrowers. Such efforts are highly commended and encouraged to continue. These assistances would be subject to independent assessment by the banks on a case-to-case basis. The current deferment package arising from the COVID-19 pandemic in Malaysia is an extension of these measures across all FIs to widen access to short-term financial relief by households and businesses that need it the most in these challenging times. It is worth to note that not everyone will be affected by the resumption of loan repayments as most working Malaysians remain employed with about 95.4 per cent of the total labour force was employed as of end September 2020, where 15.19 million persons were employed (as compared to 15.15 million persons the previous month)6. This is further supported by the increased number of individual borrowers who continue to repay loan installments and opt-out of the moratorium facility to 601,000 in July 2020 from 331,000 in April while the number of SME borrowers, who have chosen not to take this facility, has increased to 13,000 in July from 5,000 in the same period7.
Other Countries - In other countries, certain conditions have to be met first in order for the borrowers to qualify for the moratorium amid the coronavirus (COVID-19) crisis and a period of 6 months loan deferment is typical e.g. countries such as Australia, New Zealand and India have also granted 6 months loan deferment. A brief overview on the banking assistance offered at other countries is marked as Appendix 1.
- Targeted Repayment Assistance
The blanket loan moratorium has expired on 30 September 2020 and banks in Malaysia have moved into the next phase by offering targeted repayment assistance. Banks in Malaysia continue to encourage affected borrowers to contact them to discuss financial assistance measures available to them. In addition, banks in Malaysia have been actively reaching out to potential affected borrowers on the financial assistance that could be offered post 30 September 2020.
As the economy starts to recover from the impact of the pandemic, banks in Malaysia would be focusing on targeted assistance approach to households and businesses based on their financial circumstances and challenges.
30 July 2020 - As announced in the press release issued by ABM, repayment assistance will be available for borrowers adversely affected by the COVID-19 pandemic upon the expiry of the blanket moratorium on 30 September 20208. Under the targeted repayment assistance measures, conventional banks will provide additional assistance post 30 September, specifically for individual borrowers who have lost their jobs in 2020 and to those individual borrowers who are suffering from a drop in income due to the COVID-19 pandemic (collectively known as the “Severely Affected Categories”). The additional specific assistance to be provided are as follows:
- Individual borrowers who have lost their jobs in 2020 and have yet to find a job can apply to their banks for an extension of the loan moratorium for a further 3 months; and
- Individual borrowers who are still in employment but whose income have been affected due to the COVID-19 pandemic (e.g. as a result of reduced working hours, pay cuts, etc.) can contact their banks to change the terms of their financing facility so that the monthly instalment will be commensurately reduced for at least 6 months from 1 October 2020, depending on the type of loan/financing.
For hire purchase financing, affected borrowers will be offered revised instalment schedules that are consistent with the Hire Purchase Act 1967. In addition, assistance is also available for affected borrowers who do not fall within the Severely Affected Categories stated above.
In this regard, borrowers who require further assistance after the blanket moratorium ends are urged to contact their banks to discuss the repayment assistance options suited to their circumstances as early as possible. Banks will assist affected borrowers in a more targeted, case-by-case approach to enable banks to focus on supporting those in real need of assistance whilst also supporting the country’s economic recovery. The affected borrowers may include, but are not limited to SMEs, corporates and other individuals, who are still facing difficulties with their loan/financing repayments and cash flow problems arising from the COVID-19 pandemic. Examples of such repayment assistance include payment of interest/profit only for selected products for a specified period, possible extension of the loan/financing tenure to enable lower monthly instalments and amending other terms and conditions of the loan/financing where appropriate.
9 September 2020 - BNM announced that it is conducting an online survey of applicants of targeted repayment assistance. The survey will be used to inform its understanding of banking consumer experiences in discussing assistance needs during this challenging period. The survey may be taken by individuals or SMEs, with the relevant links provided in BNM’s website9.
Under the 20th LAKSANA report, the Finance Minister said that a total of 732,000 borrowers who took the automatic moratorium have resumed their monthly loan repayment instalments4.
30 September 2020 - According to the ABM’s press release, in line with its commitment to support affected borrowers, the banking industry has adopted a simplified application and documentation process for targeted repayment assistance. The banking industry is cognizant that while the economy is recovering, many borrowers may still be finding their footing and reorienting themselves amid new realities and uncertainties. If repayment obligations become a challenge in the coming months, borrowers can be assured that the window to discuss alternative repayment arrangements will remain open10.
Individual banks have directly engaged over 2 million borrowers through calls, emails and SMS to offer repayment assistance. According to BNM, there also continues to be a steady increase in borrowers choosing to resume payment of their monthly instalments. BNM highlighted that applications for repayment assistance at any time before 30 June 2021 will not appear on a borrower’s CCRIS records11. Banks have also assured that acceptance of the targeted extension of the moratorium and repayment flexibilities during this period will not appear in the CCRIS reports of individuals and SMEs.
19 October 2020 - BNM in its press release had assured borrowers that repayment assistance will remain available for borrowers whose incomes have been affected by the pandemic. Borrowers who declined repayment assistance for now would still be able to apply for targeted assistance throughout 2020 and into 2021 if their financial circumstances change in the future. BNM said that a targeted approach to repayment assistance extends relief measures more sustainably, while lending strength to the economic recovery. Banks have been entrusted by the public to manage their savings. The public, as depositors, expect that banks discharge their fiduciary obligation by managing these funds prudently and using them to provide loans to the economy for productive purposes. In addition, banks source capital from institutional funds, such as those managing the pensions, retirement funds and investments of Malaysians. It is therefore important to preserve a healthy credit culture where borrowers who can afford to repay do so12.
According to BNM, assistance requested / received by the borrowers will depend on their circumstances as follows:-
- 40% were granted an extension of the moratorium
These consisted mainly of individuals who have been recently made unemployed, as well as businesses in sectors that may still be experiencing significant operating constraints caused by the pandemic.
- 60% received a reduction in instalments
Borrowers who have requested a reduction in instalments includes those in the B40 group. These instalment reductions put individuals and SMEs on a path to start paying down their loans, at levels which they are comfortable with.
- Enhanced targeted repayment assistance
6 November 2020 - Following the announcement by the Finance Minister of Malaysia, YB Senator Tengku Dato’ Sri Zafrul Tengku Abdul Aziz during the 2021 Budget speech, BNM has issued a press release to provide additional details on the announced measures to households and businesses affected by COVID-19. The Finance Minister said that to-date, more than 650,000 applications for repayment assistance have been received, with a high approval rate of 98%13. The following measures are part of continuous efforts by the financial industry to support economic recovery, while also safeguarding the livelihoods of Malaysians14:-
- Enhanced targeted repayment assistance.
- Establish additional financing facilities to provide relief and support recovery for SMEs i.e. RM2 billion Targeted Relief and Recovery Facility (TRRF), RM500 million High Tech Facility (HTF) and RM110 million increase in allocation for the Micro Enterprises Facility (MEF).
- Other Initiatives such as the Expansion of iTEKAD programme and Perlindungan Tenang Protection for B40.
ABM in its press release dated 6 November 2020, also announced that the enhanced targeted repayment assistance will be available to B40 borrowers who are recipients of Bantuan Sara Hidup (BSH) / Bantuan Prihatin Rakyat (BPR) and microenterprises with loans where the original facility amount is up to RM150,000. Under this enhanced targeted repayment assistance, eligible borrowers will be offered two options to choose from, i.e. either a 3-month deferment of instalment or a 6-month reduction in instalments by 50%15.
Each eligible borrower can only take up one of the above options under this enhanced targeted repayment assistance for each loan, from 1 December 2020 until 30 June 2021. Only loans that were approved before 1 October 2020 and are not in arrears exceeding 90 days as at date of request by the borrower would be eligible for this enhanced targeted repayment assistance. For married couples who are eligible for BSH/BPR based on household income, both husband and wife would be eligible for this package if they have bank loans. This enhanced targeted repayment assistance will be available to eligible borrowers between 23 November 2020 and 30 June 2021. The enhanced targeted repayment assistance will be available for instalments due in December 2020 onwards, and will take effect at the next instalment following a borrower’s request and confirmation.
All borrowers, regardless of whether they are recipients of BSH/BPR, categorized as M40 who are registered in the BPN database or not, who wish to discuss their financial repayment options with their banks and obtain advice on the targeted repayment assistance options available to them are welcome to contact their banks at any time, via their banks’ various official channels (e.g. the banks’ websites, branches, customer service hotlines).
To request for this assistance, eligible borrowers will only need to confirm their repayment option with their bank. Additional documentation from borrowers is not required by banks to obtain repayment assistance.
26 November 2020 - During Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz’s winding-up speech on Budget 2021 in Parliament, he announced that more than 700,000 Malaysians had applied for the second moratorium phase, now under Budget 2021, with some 98% of applications approved. He added that the government will be consulting with banks moving forward, and that the government is committed to helping the people if the situation worsens due to the Covid-19 pandemic17.
1 December 2020 – BNM issued press release (New and enhanced financing facilities for SMEs affected by COVID-19) to provide further information on the implementation of two funds, namely TRRF and MEF, as announced in the Budget 2021 speech by the Minister of Finance. According to BNM, details of HTF will be announced on 15 December 202018.
For borrowers who are able to start repayments, this would be in their interest as resuming repayments would reduce the borrowers’ overall cost of borrowings. Any loan forbearance will still assume an eventual full repayment of arrears. Therefore, borrowers must practice financial discipline to repay the arrears owed to the banks and strive to cultivate a good record of loan repayment as the viability of a credit system depends on loans being repaid.
It is important to note that should there be another round of blanket moratorium, there will be insufficient inflow of funds to support the outflow. In the current context, the outflows are mainly depositors who are affected by the COVID-19 pandemic who would withdraw their savings. Under such circumstances, the safety buffers that banks have built over the years would eventually be depleted as seen in previous crisis, for instance the failure of the first British bank, Northern Rock Bank (NRB) in 150 years as a result of a bank run during the global financial crisis 13 years ago. Also, the banks’ risk aversion will increase, similarly when people are more cautious in their spending when savings are at stake during such times. From a historical perspective, every time there is an economic crisis, the percentage of household debt increases every year. Malaysia’s household debt is one of the highest in the world at 90 per cent compared with more advanced economies such as follows:-
- Germany at 55 percent
- United States of America at 85 percent
- Hong Kong at 82.7 percent
- Singapore 65 percent.
Banks’ primary role is to take in funds (in the form of deposits and shareholdings in the banks) from depositors, pool them, and lend them to those who need funds. In simple words, banks are intermediaries between depositors (who lend money to the bank) and borrowers (to whom the bank lends money). Ultimately it is our money in the form of deposits and our money in the form of shareholdings in the banks that is used to match up the creditors and borrowers. The performance of the credit sector plays an important role as a catalyst for economic growth today. Therefore, when the buffers deplete and loan demand weakens, banks would not be able to declare dividends as they will rely on retaining their earnings to strengthen their capital. With no dividends to be declared by the banks, it is not only the Top 20 per cent (T20) of the Malaysian population who will be affected, but Malaysians in general as well, who would receive less or even no benefits from their deposits which are in unit trust funds or in bank deposits.
In view of the above implications, the right approach to address the current pandemic situation is having targeted repayment assistance, to be given in a transparent, fair and equitable manner to those in real need, be it in the form of a targeted extension of the moratorium or repayment flexibility options (i.e. reduced repayment, restructured loan). We must keep in mind that there is a need to maintain a sound financial system which are able to carry out a counter cyclical role to support the transformation of the economy16.
- Other Measures by the government
Apart from the measures and assistance being provided by the banking institutions, there are various other initiatives including the PRIHATIN and PENJANA economic stimulus package amounting to RM295 billion19 by the Malaysian government (marked Appendix 2) to aid those who are financially affected by the COVD-19 pandemic.
According to a Joint IMF-World Bank Staff Position Note with an overview of measures taken across jurisdictions to date, in order to alleviate further operational pressure and burden on banks, many authorities have revised their enforcement approaches by putting on hold or postponed non-critical reporting and/or stress testing exercise20. However, banks are still required to implement enhanced credit monitoring approaches so that market discipline continues to play its critical role. Authorities have also recognized and exerted efforts to reduce moral hazard to promote transparency and risk disclosures by:
- making the measures time bound
- clearly defining the sectors and loans who are able to access these measures
- requiring additional reporting to facilitate banks in monitoring and assessment of the impact of the measures
In the Malaysia context, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz said the banking sector is estimated to see losses of RM6.4 billion during the loan moratorium period, between April and September i.e. losses of approximately RM1.06 billion per month based on Malaysian Financial Reporting Standards (MFRS) 9. According to the Finance Minister, over the six-month blanket moratorium period, banks could incur RM79 billion loss in capacity to provide loans, otherwise known as “modification loss”5. “Modification loss” is the reduction in the banks’ capacity to disburse new loans worth RM79 billion to the borrowers i.e. individuals and businesses. This amount is the total that banks can lend individuals and businesses in a normal business situation over the six-month period.
According to BNM’s Financial Stability Review for First Half 2020, banks reported a marked decline in earnings from domestic banking activities during the first half of the year, weighed down by further margin compression and higher provision for credit losses. On a positive note, significant relief measures introduced have kept business loan impairment ratios low and stable at 2.5 per cent for overall non-financial corporates. Households continue to maintain comfortable levels of financial assets and liquid financial assets at 2.2 times and 1.4 times of debt, respectively, as relief measures introduced by the government and banks released extra cash to households. Business conditions are expected to improve in the second half of the year, in line with the gradual improvement in economic activity. The extension of targeted financial relief measures will continue to help support businesses alongside corporate and small and medium enterprises (SMEs) guarantee schemes as the recovery takes a stronger hold. Based on BNM’s statistics, since July, the number of businesses receiving repayment assistance from banks has increase seven-fold. In the first half of 2020, the banking system as a whole disbursed a total of RM120 billion in lending and financing to the SMEs with more accounts being approved in 2020 compared to the same period in previous years. BNM also revealed in its report that the local banks’ credit cost could rise to RM29 billion in 2020 and 2021 on the back of higher projected loan impairments21.
In its base case, S&P Global Ratings expects that most banks in Asia-Pacific would absorb the hits from COVID-19, and start to recover by the end of 2021. Nevertheless, a more severe or prolonged hit to the economies than the current baseline would almost certainly push banks’ credit losses higher, drive their earnings lower and amplify other risks22. In a report on 6 Oct, Moody’s said it expect asset quality to deteriorate significantly in Asia-Pacific as economic conditions remain weak, while profitability will take a hit from rising credit costs and declining margins23.
Borrowers are reminded that the decision made from the beginning to apply and obtain bank loans marks a specified term of commitment and represents a significant financial obligation for an individual or a particular business. Therefore, rigorous financial planning and the availability of sound financial buffers against unexpected events are critical. The banking industry welcomes the announcement from the Government to end the blanket moratorium and move towards a targeted assistance approach. In this regard, borrowers who are still facing financial hardship after the 6 months blanket moratorium will have to pro-actively reach out to their bank(s), for discussion on their options for further specific assistance. Alternatively, borrowers can also approach the relevant “one-stop” centre to work out an appropriate assistance package i.e. Credit Counselling and Debt Management Agency (AKPK) for individuals and Small Debt Resolution Scheme (SDRS) for SMEs (effective 1 September 2020, BNM has transferred the SDRS function to AKPK to help SMEs, including micro SMEs24). All other borrowers who have taken the blanket moratorium and now have the means are advised to resume repayment effective 1 October 2020 as it will reduce their overall debt and borrowing cost.
The banking industry has been actively reaching out to borrowers in various ways and has conducted more than 150 engagement sessions including repayment assistance campaigns across the country as well as direct engagements with various stakeholder groups, including SME associations. To ease the application process, banks have simplified the application process and enabled the entire process to be done online. Our member banks are sympathetic towards the plight of their borrowers who have been negatively affected by the COVID-19 pandemic and have been working closely with the regulator to ensure that assistance continues to be provided to affected borrowers. The banks have supported borrowers through the challenging economic environment since the start of the COVID-19 pandemic and remain determined to support borrowers, as well as the economy in general, navigate out of the pandemic.