What the 6-month moratorium controversy is all about

It looks like the controversy over the six-month moratorium that has become the talk of the town of late is all about how Bank Negara Malaysia is caught between the Finance Minister Tengku Zafrul Tengku Aziz on the one side, and the banking industry on the other.

Being a former banker, many think it was the finance minister who was behind the so-called U-turn in allowing banks to compound the interest on the deferred six-month loan.

But let us be clear on this.

Zafrul, on March 27, was on record in the Awani programme “Consider This”, to have said, “So she (Makcik Kiah) does save on her interest, as you know many of the banks have announced that interest will not be compounded, will not be accrued but if you look at this plan (the moratorium) it is to help the immediate situation, it is to ease the cashflow.

“I think at the end of the day, what is important is we get people like Makcik Kiah and her husband and her son that has just graduated to have food on the table … so cashflow of household is very important. So that was the main purpose. It was not so much for them to make money. It is for survival.”

In light of the above statement, it makes full sense that Prime Minister Muhyiddin Yassin on announcing the stimulus package the day before had profusely thanked the banks for their assistance in agreeing to the six-month moratorium.

So, it seems it is the banking sector now which had made the U-turn on compounding the interest on the deferred loan, and trying their luck to get Bank Negara on their side through the subtlety of the need to change the hire purchase agreement to reflect the changes in the loan instalment to accommodate the compounded interest.

At this juncture, let us be clear on what the moratorium is all about.

It is a deferment in paying your loan for six months (April to September) due to the difficult and hard time everybody is facing during the Covid-19 pandemic.

The six-month moratorium was and is never meant to be an instrument that is intended to write-off the loans. So, clients of banks with loans will still have to pay their monthly loan instalment (which includes both the principal and interest) after the moratorium has ended.

The banks, of course, have the right to compound the interest on this deferred loan accumulated for six months, but as we can see from Zafrul’s statement on Awani, the banks had already decided not to compound the interest.

This is indeed magnanimous of the banks to do so during this difficult time. And it is within the capacity and capability of the banks in general to be magnanimous seeing that unlike the global financial crises of the past where banks were also hard hit with problems of liquidity, this time around, according to experts, banks the world over have been spared from a liquidity crisis.

In fact, to capitalise on this magnanimity of the banks, we proposed to the government that in this difficult time banks waive too the interest on the six-month loan to go with the moratorium.

However, our proposal was accepted only for the micro SMEs.

So, what has caused the banks after acquiescing to this noble deed to “rescind” it more than a month later?

Could it be because of greed? Perhaps.

Who knows when they finally see that the opportunity cost of foregoing this compounded interest is in the billions, they started to be starry-eyed and “die-die” want their monies back by trying their luck to convince BNM to be on their side?

But it was also the die-hard attitude of Zafrul that could save the rakyat from the clutches of the bankers when he insisted recently that he had already announced more than a month ago to the rakyat that banks had already agreed to forego compounded interest and made an appeal to banks, when he doesn’t have to, to forego the compounded interest.

According to a BNM statement on March 25, the banking system is facing the Covid-19 crisis from a position of strength, with excess capital buffers above the minimum regulatory requirement of RM119.7 billion as at end January 2020, which is a sure proof that their liquidity position is better than most.

And they will still be making profit because the same amount of principal and interest forgone will be paid to them after the moratorium has ended. It is just a question of making less profit without the income from compounded interest.

So, what is the way forward?

Since the moratorium is an automatic decree that was announced by the government to banks via BNM as the regulator of banks, nothing in the hire purchase agreement has changed other than the decree to automatically stop receiving instalment payment for six months from their clients.

Because the moratorium is automatic, there is no question of opting in for it. Everybody is in.

But those whose financial position does not change much during the six months of moratorium can opt-out from it.

Either way, the hire purchase agreement is not affected.

The agreement is affected only when the moratorium ends in October. At that point all banks need to do is to send a circular endorsed by BNM that those who do not opt-out for the moratorium will have their loan period extended by six months with the same instalment amount as before the moratorium.

According to Zafrul, this has been done before.

Or the banks could give an option of settling the lump sum of six months deferred payment to the last instalment if their clients wish to retain the same loan period.

Yes, the banks did give this option of a lump sum settlement but at the moment when moratorium is lifted in October.

But this is a no brainer since so soon after the moratorium lapses, when people in general are still living in difficult and trying times as the pandemic is said to last between 12 to 18 months, they are made to raise a lump sum of seven months of instalment (including the instalment in October).

If the lump sum payment is deferred to the last month of the instalment, the borrower would have more than enough time to raise the requisite amount.

Jamari Mohtar is director of media and communications at EMIR Research, an independent think-tank focused on strategic policy recommendations. - FMT