Waiving interest during loan moratorium can be disastrous, says BNM

 

Bank Negara Malaysia governor Nor Shamsiah Mohd Yunus says 80% of banks’ income comes from interest collected from loans. (Benama pic)

PETALING JAYA: A full interest waiver during the loan moratorium will result in serious negative consequences for banks and more difficulties for the people, Bank Negara Malaysia (BNM) governor Nor Shamsiah Mohd Yunus has said.

After the opt-in loan moratorium was announced by the finance ministry under the Pemulih aid packages, the assistance programme came under scrutiny for not waiving accrued interest during the period of the moratorium, with many pointing out it would add additional costs to borrowers in the future.

While announcing the central bank’s latest GDP figures, Nor Shamsiah said interest collected from loans represented around 80% of the banks’ total income, and to remove it during a moratorium would harshly affect their liquidity.

She noted that to help borrowers, banks had already agreed to waive late charges and compound interest on applicants’ loans during the moratorium period

“Interest accrued during loan moratoriums are to cover the funding costs of banks, including the payment of interest on deposits and other borrowings by banks to fund loans. They have to borrow in terms of deposits of bonds or other forms to give out loans.

“Waiving accrued interest payments on all individual and business loans under the moratorium would have significant long-term consequences,” she said.

Nor Shamsiah said the effect on the banking system’s liquidity would force banks to cut back on lending to preserve their own cash buffers built up during times of economic prosperity to insulate them against economic shocks.

“The banks’ own credit ratings may also be downgraded to reflect weaker future earnings capacity, and this will make it more expensive to raise capital and funding and these higher costs would be passed onto borrowers.

“Confidence in banks would be affected, and this could trigger liquidity stress and depositors may have concerns about the safety of their deposits and this action would also jeopardise depositors’ interest,” she said.

Reduced deposits and income would also adversely affect the banks’ abilities to pay dividends to both retail and institutional investors, which would reduce the returns delivered by funds like the Employees Provident Fund, Permodalan Nasional Berhad, Lembaga Tabung Angkatan Tentera, among others.

“When you take all this together, (waiving interest) would significantly hurt economic recovery and have longer term ramifications for the economy and financial systems.

“It is very critical for banks to remain sound, as this is what will enable them to provide the extensive repayment assistance that borrowers need at this time.

“And, to our knowledge, the repayment assistance offered by Malaysian banks has been the most extensive of any county in terms of scale and scope.” - FMT