Fallacy of interest-free moratoriums on loans

CALLS for an interest-free moratorium are a dangerous idea that will have adverse implications if implemented. To quote a Netizen’s comment: “Someone who has your best interest at heart will want you to settle your loans as fast as you can.”

The fact is, loans need to be repaid with interest because there is a time value to money. Imagine that you lend RM10,000 today, and 50 years later you’re repaid with the same amount. Does it sound like a fair trade?

During the pandemic, the key principle should be that those who are able, should continue repaying, while those who are not, should have their repayment tailored to suit their conditions.

Both groups of borrowers must be treated with equity.

Giving an interest-free moratorium violates the third principle, as it is unfair to those who continue repaying the loans. It also incentivises borrowers who do not need the moratorium to opt for it, thus violating the first principle as well.

The options are made available by banks for borrowers to tailor their repayment according to their conditions.

You can’t impose the same repayment criteria on all borrowers. Some borrowers who are not viable should not be allowed to continue to defer their loans, which will only harm them further in the long run.

Giving an interest-free moratorium is not viable, as banks act as custodians of the savings of depositors and pay interest on them. The World Bank said that for every 1,000 adults in Malaysia, 708 of them are depositors, while only 314 are borrowers.

Furthermore, banks can only lend as much money as they have in deposits (after leaving aside a sum for Statutory Reserve Requirements), which they need to pay interest on despite the pandemic.

Not to mention that there has been a significant increase in bank deposits since the start of the Movement Control Order, according to Bank Negara Malaysia.

Drawing a parallel with a case in India, earlier this year, the Supreme Court, in a judicial review, ruled that a complete interest waiver on loans is not possible because banks need to pay interest to depositors and shareholders.

It is often argued that banks made millions and billions during the pandemic, so they should be able to absorb any loss arising from providing an interest-free moratorium.

The fallacy here is to say that because people are doing well, they should be slapped with penalties to achieve “fairness”.

Have banks not paid their share of taxes just like other companies?

This line of thinking also opens up a can of worms. According a news article, most of the top 100 Malaysian companies made millions and billions in profit in a single quarter (3Q20). So should these companies be punished and slapped with windfall taxes as well since they’re doing well?

Some quarters have suggested that to facilitate an interest-free moratorium, the government can compensate banks with tax credits. Again, this argument is raised without any thought of the economic consequences of such a measure.

Giving tax credits to fund interestfree moratorium takes away crucial government revenue that could be used to provide vital assistance to others.

Finally, assistance cannot be rendered only through measures such as moratoriums and Employees Provident Fund withdrawals as these measures have negative long-term implications on the economy.

Assistance needs to be designed to help people and businesses to adapt to current and future circumstances. We must refrain from supporting populist measures that keep obsolete zombies alive.

WONG TECK JIN Kuala Lumpur