How things went wrong for banks

Affected by a badly communicated moratorium plan

BANKS are in a lose-lose situation. Borrowers frown upon them for making millions and expect them to make less money in tough times.

The government, meanwhile, is using financial institutions as a platform to ease the burden on borrowers saddled with loan repayments during the Covid-19 pandemic.

The cornerstone of the Rm250bil stimulus package announced by Prime Minister Tan Sri Muhyiddin Yassin on March 27 was a six-month moratorium on loan repayments. It made up Rm100bil of the total package.

However, neither Muhyiddin nor the Finance Minister, Tengku Datuk Seri Zafrul Abdul Aziz, made it known to the masses that there was no such thing as a “free lunch” in the high world of finance.

When a moratorium on loans is allowed, it means people have more money in hand for six months at the expense of the banks. During this period, somebody has to pay for the carrying cost, or what is better known as the interest accrued over the six months.

However, the message was not well conveyed to the masses, with fingers now being pointed at Bank Negara for the miscommunication mishap.

Mortgages do not pose a problem for the banks with regard to the recovery of the accrued interest. This is because mortgages come with a variable interest rate, which allows the banks to adjust the monthly repayments.

For instance, when interest rates drop, by right they should be accompanied by a drop in monthly installments. But banks need not extend the benefit to borrowers and instead use the opportunity to recover the accrued interest.

The borrower is not affected, as their repayment remains the same, while banks need not provide in the books for accrued interest they cannot collect.

However, banks will face a problem with loans where the rates are fixed over the tenure, such as hire purchase (HP) facilities and personal loans. If they do not have an option to recover the accrued interest, banks will need to provide for the loss in income in their books. Although the loss in income is only an accounting entry, it is an item that affects their profitability.

At the end of April, a month after the moratorium was announced, banks came up with several options to recover the accrued interest on HP financing.

Among them is to increase the repayment amount in the last six months of the loan tenure. For instance, if the HP loan has another six years to go, the period would be extended by six months where the borrower would pay the accrued interest in addition to the installments over the last six months.

For the banks, the logic is that borrowers should not be saddled with an increase in their monthly repayments when the moratorium ends and repayment starts in October. As a banker said, “the runway should be as wide as possible for borrowers so that they do not default”.

However, this caused a brouhaha.

Borrowers contended that banks should bear the burden of the accrued interest, while some even felt that they would have opted not to take up the offer on the moratorium on loans had they known that interest on the six-month period would be accrued and charged.

It became a political issue with the government coming under fire.

Moreover, the bulk of the HP financing borrowers are from the civil service and lower-income group.

Under pressure, the Finance Ministry eventually announced that banks would waive the accrued interest during the moratorium period. This means banks would absorb the bill, which could be anywhere between Rm1.3bil, as estimated by an analyst, and Rm4bil.

The profits of banks have already been impacted by declining lending rates.

They also have to deal with a new kind of risk of not knowing how many of the borrowers would be able to resume their loan payments when the moratorium ends.

In addition, they have to take the hit on the accrued interest for HP financing.

During a crisis, banks are expected to be compassionate. So, the move to coerce banks to give a six-month moratorium is one that the financial institutions did not resist.

And in doing so, they will now pay the price for a badly communicated message by the regulators on the accrued interest during the moratorium period.

While the moratorium is a good option to keep the economy going, questions arise as to why it was accorded to all and sundry.

Not all segments of the borrowers are suffering from the Covid-19 pandemic. Life has not changed for some groups of borrowers.

For instance, the salaries of employees in large companies and civil servants remain unchanged. Their employment is safe. If nothing has changed, why should this group be given free money with banks having to incur the accrued interest?

While the issue of accrued interest in HP financing has been resolved, a nagging question that has not been addressed yet is the accrued interest in personal loans. So far, nobody has touched on who would bear the cost of the interest accrued over the sixmonth period.

The banks are silent because they will become the punching bag in times of crisis if they do voice out their concerns (see story on personal loans on page 4).

Banks are viewed as ruthless and always profitable. On both counts, it is true. Banks are supposed to be ruthless and profitable. The larger economy will be in trouble if banks are not prudent and profitable.

There will be no lending and no money for business to thrive and provide employment. Nobody gains if banks fail.