Loan moratorium: To extend or not?

THE debt moratorium for borrowers was the centrepiece of the economic rescue package that was first announced on March 24.

The idea of granting a six-month grace period of the repayment of debt was to ease the cashflow of individuals at a time when the economy was at the throes of the Covid-19 pandemic.

The worry then was people, if they were to carry on with the obligation of paying off their borrowing, would become cashstrapped as the economy entered a crunch.

The priority was for people to have enough money to put food on the table and to finance other essential obligations.

The banks agreed to the government’s request for the six-month moratorium that would see people resume paying their housing and car loans after that period is over.

Since then, the economy has been on the recovery track.

The latest purchasing managers’ index for June shows an expansion in factory output and the reading was the highest since September 2018.

The stock market is up and generally the economy is getting back to its ways again. But all is still not well.

The recovery is ongoing but sluggishness remains.

Loan growth, a reliable indicator of economic activity, was decent with loans expanding by 3.9% in May from a year ago.

Gross impaired loans were stable with the impact from Covid-19 not factored in as year given the debt moratorium.

But there is a high level of caution within the economy.

Loan approval and application plunged 54.4% and 39% respectively in May, indicating that the public are still apprehensive when it comes to buying big-ticket items.

The majority of household debt is loans taken to buy houses and cars.

But as the moratorium approaches the halfway mark, there are now conflicting views on what happens post-september when people are expected to start repaying their loans.

The government feels that an extension should be given to targeted groups who are still vulnerable to the economic crunch that has taken place during the second quarter of the year.

Most banks are hesitant to continue with a blanket moratorium as the acceptance rate from its borrowers is high.

Should a large number of its customers continue to defer from paying their debt, then the banks will have to take a further modification charge to account for the further extension of any moratorium.

Furthermore, that will also affect the risk appetite of banks.

As shown in May where the rate of loan approvals had plunged, there will be more hesitancy among banks if the picture is still cloudy.

But for borrowers, the indication is that there will still be a large number of them who will like to continue to postpone paying their loans.

Anecdotal evidence based on user reaction to news of targeted extension shows that a large number of borrowers do want an extension.

But the acceptance rate of any delay should fall from the high number currently and as time goes on, more people will be willing to resume paying off their debt.

After all, timely repayment of their debt, added with greater certainty over their job security by then, could persuade people to start honouring their obligations.

Nonetheless, the decibel level from borrowers and banks will certainly be amped up as the deadline of the original moratorium inches towards its intended end date.

There will, however, be consequences to an extension as one research house said it would continue to create an overhang on the sector as the market will continue to price in a risk premium on potential asset quality spike post the loan moratorium.