Govt does have control over banks on loan moratoriums

 

From Hafiz Hassan

A moratorium, as defined by Merriam-Webster, is a legally authorised period of delay in the performance of a legal obligation or the payment of a debt.

The words “legally authorised” are important and significant in the definition. They point to the fact that banks, for example, may be required under the authority of the law to delay the payment of a debt by the borrower.

A moratorium is therefore imposed – a kinder sort of word to being “forced” – on the bank.

A moratorium on bank loans can be traced as far back to the Great Depression. Laws were passed by various American states. The state of Iowa, for example, passed moratorium laws in 1933. Another 27 states followed suit within the next 18 months.

The laws gave relief to mortgagers – a moratorium on mortgage foreclosures. The laws were then challenged in the courts.

The challenges went up to the US Supreme Court, ending up in a famous case in 1934, the Blaisdell’s case. The Supreme Court upheld the law (it was the law or statute of the state of Minnesota), reasoning that the emergency conditions created by the Great Depression “may justify the exercise of (the state’s) continuing and dominant protective power notwithstanding interference with contracts.”

Blaisdell’s case was the first time the court extended the emergency exception to purely economic emergencies.

The decision can be summarised into two: (1) the state has a duty to safeguard vital interests of its people; (2) the state has the power to intervene, to safeguard the economic structure upon which the good of all depends.

Strict enforcement of particular economic rights (like the contractual rights of a bank under a loan agreement) may not be desirable because of the damage that will cause to the whole economy.

So, in the aftermath of earthquakes, floods, droughts or disease outbreaks, an emergency moratorium on some financial activities may be granted by a government or the central bank. Simply put, a moratorium can be imposed on banks.

The rationale for the moratorium is none other than the emergency of the time. The government has the duty to do everything to help keep some structure of the economy.

As such, the government can dictate what loan moratoriums banks can provide or how they are implemented, unlike what was asserted by finance minister Tengku Zafrul Aziz.

But of course, the government does not impose loan moratoriums without consultation with, and listening to, the banks.

Strictly speaking, it is for Parliament (legislature) to impose the moratorium, by way of legislation. But under emergency, the executive – often referred to as the government – is the legislature as well.

Simply put, Putrajaya does have legal force over banks on loan moratoriums. - FMT

Hafiz Hassan is an FMT reader.

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.