The Association of Banks in Malaysia
(Updated 21 September 2020)
INFORMATION YOU NEED TO KNOW ABOUT DEFERMENT OF LOAN REPAYMENTS AND THE PERIOD AFTER
Bank Negara Malaysia (BNM) had announced on 25 March 2020 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 customers. Amongst others, the deferment of all loan/financing 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/customers better manage their debt1. The deferment targets only deserving borrowers/customers 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.
What does the blanket moratorium mean here and what happens the period after?
In the current context, it is a temporary deferment or suspension of loan/financing payment obligation (principal and interest) for a limited period of time, not a waiver. During this period, borrowers/customers with loan/financing that meet the eligibility conditions do not need to make any payment, and no late payment charges will be imposed. Borrowers/customers 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/customers 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/customers were advised that interest/profit will continue to accrue on deferred payments and they should consider this in deciding whether they wish to take up the moratorium as borrowers/customers will need to honour the deferred repayments in the future1. Borrowers/customers 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 Movement Control Order (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% of total loans3. Under the 21st 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 4 September 2020 is estimated at RM85.8 billion. Out of this figure, a total of RM30 billion was utilised by the business sector while RM55.8 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.
In other countries, certain conditions have to be met first in order for the borrowers / customers to qualify for the moratorium amid the coronavirus (COVID-19) crisis and a period of 6 months loan deferment is typical. For example, 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 are as follows:
- Australia will implement a new who genuinely need that extra7. According to ABA, the initial phase of the Scheme remains available for new loans issued by eligible lenders until 30 September 2020 and the second phase of the Scheme will start on 1 October 2020 and will be available until 30 June 2021.
- All retail banks in New Zealand are offering to defer repayments for residential mortgages for up to 6 months for customers financially affected by COVID-19 where affected customers who apply to their bank will not make principal and interest payments on their loans for up to 6 months8.
- So far as we can ascertain, India have extended their moratorium where the country originally granted 3 months and then extended for another 3 months until 31 August 2020, making a total of 6 months9.
- Singapore imposes the condition that borrowers need to apply on an opt-in basis to their banks for the deferment (i.e. not on a blanket approval basis), as each individual’s financial situation is different10.
- As for Thailand, a loan payment holiday of 6 months applies for all SMEs with a credit line not exceeding THB 100 million while the payment holiday for 3 months are on principal installments for housing loans of not more than THB 3 million11.
BNP Paribas Asset Management Malaysia Sdn Bhd Chief Executive Officer (CEO) and Country Head, Angelia Chin-Sharpe said compared with regional peers, moratorium support offered by Thailand’s banks only covered 33 per cent of the country’s total loan book, followed by the Philippines (22 per cent), Indonesia (16 per cent), India (11 per cent) and Singapore (10 per cent) while Malaysian banks are the most committed to helping businesses and individuals wade through the COVID-19 crisis with up to 55 per cent of the total loan book for banks in the country are under moratorium12.
Financial institutions (FIs) worldwide including Malaysia have been proactive in responding to the needs of their borrowers/customers with various rescheduling and restructuring initiatives offered to assist affected borrowers/customers. Such efforts are highly commended and encouraged to continue. These assistance 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 95.3% of the total labour force was employed as of end July 2020, where 15.07 million persons were employed (increased by 83.2 thousand persons as compared to the previous month)13. 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 period14. With the blanket loan moratorium expiring in September 2020, banks in Malaysia are encouraging affected borrowers/customers to contact them to discuss financial assistance measures available to them. In addition, banks in Malaysia have also started actively reaching out to potential affected customers on the financial assistance that could be offered post 30 September 2020. Under the 20th LAKSANA report dated 9 September 2020, the Finance Minister said that a total of 732,000 borrowers who took the automatic moratorium have resumed their monthly loan repayment instalments4.
Deputy Finance Minister II Mohd Shahar Abdullah updated the Dewan Negara on 8 September 2020 that as at 28 August 2020, banks have reached out to some 2 million borrowers to offer targeted assistance on their loan repayments. 1.1 million borrowers have since responded when contacted by the banks and nearly 300,000 borrowers have confirmed that they really need assistance on the repayment of their loans, with the remainder still weighing the available options. With the ease of application through various channels provided, Mohd Shahar said that the numbers are expected to increase further by end of September 2020. Of the total number of completed applications for loan repayments assistance received and processed by the banks, 97% have been approved. Mohd Shahar also added that borrowers need not have to worry because the flexibility given to borrowers during this period will not will not be reflected in the borrowers’ Central Credit Reference Information System (CCRIS) report15.
Other than the deferment of loan repayments, the Malaysian government’s PRIHATIN and PENJANA economic stimulus packages, amounting to RM295bil, contains various other initiatives to aid those who were financially affected by the COVID-19 pandemic16.
The Prime Minister had on 5 June 2020 announced that measures under PRIHATIN Rakyat Economic Stimulus Package have saved over 2.4 million jobs, while over 11 million people received assistance to ease their cash flow burden, and over 300,000 companies supported. Under PRIHATIN, RM7 billion in financing to help SMEs was provided through BNM and financial institutions. These include the Special Relief Facility (SRF), Agrofood Facility (AF), Automation and Digitalisation Facility (ADF), as well as micro credit schemes17. For the SME Soft Loans Funds administered by BNM; as of 4 September 2020, the total approved applications by local banks and accepted by SMEs is RM10.4 billion, which will benefit 22,688 SMEs (an increase from 22,440 SMEs a week ago). This amount includes SRF (which has been fullly utilized by 21,000 SMEs and has helped save over 400,000 jobs18), ADF, All-Economic Sector Facility and AF funds4.
In addition, based on a survey conducted by SME Corporation Malaysia (SME Corp), the PENJANA which was announced by the government in June 2020 to aid businesses affected by COVID-19 can help small and medium enterprises in achieving business recovery19.
In addition, the Ministry of Tourism, Arts and Culture (MoTAC) had on 30 July 2020 announced the PENJANA Tourism Financing (PTF) Scheme to aid the tourism sector. According to the ABM’s press release dated 6 August 2020, the PTF which is offered by 12 participating banks in Malaysia, is aimed at supporting Malaysian micro, small and medium enterprises (MSMEs) in the tourism sector by preserving their capacity and assisting them to adjust and remain viable post COVID-19, can be utilised for working capital and capital expenditure to enhance their business models and deploy new practices20. Minister of MOTAC, Datuk Seri Nancy Shukri has urged tourism players to apply for the PTF worth RM1 billion to remain competitive in the new normal during the COVID-19 pandemic21.
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. As announced in the press release issued by ABM on 30 July 2020, repayment assistance will be available for borrowers/customers adversely affected by the COVID-19 pandemic upon the expiry of the blanket moratorium on 30 September 202022. Under the targeted repayment assistance measures, conventional banks will provide additional assistance post 30 September, specifically for individual borrowers/customers who have lost their jobs in 2020 and to those individual borrowers/customers who are suffering from a drop in income due to the COVID-19 pandemic (collectively known as “Severe Affected Categories”). The additional specific assistance to be provided are as follows:
- Individual borrowers/customers who have lost their jobs in 2020 and have yet to find a job must apply to their banks for an extension of the loan moratorium for a further 3 months; and
- Individual borrowers/customers 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.) must 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/customers will be offered revised instalment schedules that are consistent with the Hire Purchase Act 1967. In addition, assistance is also available for affected borrowers/customers who do not fall within the Severely Affected Categories stated above. In this regard, bank customers 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/customers 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/customers 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.
According to Deputy Finance Minister II Mohd Shahar Abdullah, as at 21 August 2020, the banks have contacted 1,015,848 borrowers, comprising 908,773 individuals, 94,685 SMEs and 12,390 other companies, including corporates and commercial businesses to offer financing repayment assistance. Within two weeks beginning 7 August 2020, a total of 139,424 applications for financing repayment assistance from individual customers were received, of which 109,172 were approved. For SME customers, including micro-entrepreneurs, 5,017 applications were received, of which 4,300 were approved23.
The banking industry urges borrowers/customers facing financial difficulties in servicing their commitments, including the Severely Affected Categories, to reach out to their respective banks to discuss repayment assistance options as soon as possible from 7 August 2020. Borrowers/customers are advised to apply early to allow sufficient time to discuss and confirm options, and to have repayment assistance effected in time for October 2020 instalments. On 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 website24.
Any loan forbearance will still assume an eventual full repayment of arrears. Therefore, borrowers/customers 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.
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 exercise25. 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
How are banks impacted?
By granting the moratorium, banks' liquidity coverage ratio (LCR) will decline more significantly as banks would still require working capital to continue paying for interest expense, meet deposit withdrawals, debt repayments and sustain its overheads. The loan deferment would also impact upon the banks’ cashflow as payments from their customers will not be forthcoming until 6 months later. However, if borrowers/customers continue to face repayment/payment constraints after the 6 month blanket moratorium expires, higher default rates will start to show up on banks’ balance sheets and will be reflected as higher impaired loan provisions or credit cost.
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.
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 risks26.
Borrowers/customers 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/customers who anticipate financial hardship after the 6 months blanket moratorium expires will have to pro-actively reach out to their bank(s) as early as possible from 7 August 2020, for discussion on their options for further specific assistance. Alternatively, borrowers/customers 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 SMEs27). All other borrowers/customers 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. Our member banks are sympathetic towards the plight of their customers 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/customers through the challenging economic environment since the start of the COVID-19 pandemic and remain determined to support borrowers/customers, as well as the economy in general, navigate out of the pandemic.