HP loan twist negative to banks with higher exposure
Banks with a higher exposure to hire purchase (HP) loans are at a disadvantage following the Finance Ministry urging financial institutions to consider waiving the accrued interest/profit during the moratorium period from April to September this year.
This was a turn of events subsequent to Bank Negara Malaysia’s (BNM) announcement on April 30, 2020, highlighted Affin Hwang Investment Bank Bhd (AffinHwang Capital) yesterday.
“On one hand, BNM’s move is positive for the banking sector as it cleared some recent confusion. Nonetheless, if BNM has to reverse its move, the impact of a higher ‘modification loss’ would have to be charged to the banks’ profit and loss, and is more negative on bank’s earnings with high HP exposure,” it said in its report.
On April 30, BNM announced that all banks are in the process of formalising agreements with HP and fixed-rate Islamic financing customers on the revised payment terms (in-line with procedural requirements under the Hire-Purchase Act 1967 and syariah requirements), in order to give effect to the six-month moratorium as announced on March 25, 2020.
As a result, contrary to what was announced earlier (that no interest/profit charged for deferred instalments), borrowers who would like to take up the moratorium offered, will now have interest/profit charged on the deferred HP loans or fixed-rate Islamic financing instalment amounts.
Subsequent to BNM’s announcement, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz has urged banks to consider waiving the accrued interest on HP loans and profit on fixed-rate Islamic financing loans during the sixmonth moratorium period.
The Ministry of Finance has said that it will take proactive measures to resolve the matter together with BNM and the
On one hand, BNM’s move is positive for the banking sector as it cleared some recent confusion.
AffinHwang Capital
banking institutions, and that the government is always aware of the people’s voices.
Borrowers who wish to take up the moratorium on their HP loans and fixed rate Islamic financing will have to ‘opt-in’ and inform their respective banks of their preference (unlike previously, whereby all borrowers are given an automatic opt-in.
Borrowers should weigh the pros and cons of deferring the payments, in particular their ability of meet payments after the moratorium.
For HP loans and fixed-rate Islamic financing borrowers who choose to ‘opt-in’ to the moratorium period from 1 Apr20 to 30 Sept20, the instalment amount will remain the same.
“Should BNM take heed of the Ministry of Finance’s urge to waive these interest/ profit charges on the deferred instalments/principal (for Islamic-based financing), the banking institutions would have to then take a larger impact of a ‘modification loss’ on their respective income statements or profit and loss accounts,” AffinHwang Capital cautioned.
A ‘modification loss’ is defined as the difference in the gross carrying amount of a loan (or financial asset) based on the difference between the present value (PV) of the modified contractual cash flows (discounted at the loan’s original effective interest rate) vis-à-vis the PV of the original contractual cash flows before any modification to the terms of the loan (involving extension of contract, interest waived, payment holiday).
“Banks with larger HP exposure as a percentage of their loanbook, such as Public Bank, Hong Leong Bank, Maybank. Affin Bank and AMMB may potentially have a larger modification loss being recognised in their income statement vis-à-vis banks with more variable rate loans arising from the moratorium period granted,” it added.
“We understand at this juncture, there are no changes to the terms of the moratorium on other loans such as the variable rate mortgages and SME loans outstanding. These loans, which are also subject to the 6-month moratorium period, will continue to have interest running (but not compounded; and no late payment charges imposed).”