Time of reckoning for borrowers

Moratorium will end for most people come end-september

THE reality of the new loan moratorium scheme is that the leeway for most people to postpone their repayments to banks will end next month.

Unlike the previous loan moratorium scheme where everyone enjoyed the benefits of the moratorium, this time around only those genuinely affected by the Covid19 pandemic should be able to get a reprieve on their repayments.

For individuals, they have to show proof of them being unemployed due to the Covid19 pandemic. As for those running their own business, the option is for them to restructure and reschedule the repayment. The options include an arrangement where they have to only service the interest on their loans for a period of six months.

Even those whose salaries have been cut have an option to restructure and reschedule their loans.

The most important operative phrase in the carefully worded statement by the Finance Ministry on the new moratorium scheme is that the onus is on borrowers to contact the bank if they want some kind of leeway on their repayments.

What this means is that after Sept 30, there is no automatic moratorium for borrowers. Whether they are unemployed or their business have been affected, everyone who wants a reprieve will have to contact the banks. Previously, the moratorium was automatic.

All individuals and companies with mortgage, hire purchase and personal loans were allowed not to pay their loans.

Even those who could afford to pay and were not affected by the Covid-19 pandemic opted not to pay.

As stated by the MOF, Malaysia was the only country to give a blanket moratorium on loans to all and sundry. In many ways, it helped keep the economy afloat because of the ample liquidity supplied within the system. The moratorium on loans is estimated at Rm100bil. This is akin to putting cash in the hands of the people to that amount.

The multiplier effect on the economy would have been huge, considering Malaysia’s gross domestic product is only RM1.5 trillion.

The moratorium, which was proposed by the banks in March when Malaysia implemented a lockdown, inevitably became a political tool that earned the then newly minted government, led by Tan Sri Muhyiddin Yassin, brownie points.

It helped him gain popularity and win over disgruntled voters quibbling over the status of the Perikatan Nasional coalition being a “backdoor” government.

The general view was that the blanket moratorium on loans would not have been possible under the Pakatan Nasional government.

The blanket moratorium was a setback for banks.

Delinquent borrowers would not entertain calls from banks to update their payments. Even now, as the moratorium comes to an end, the banks are concerned that the delinquent borrowers would stall their repayments.

Starting from Aug 8, a week after the Hari Raya Haji celebrations, borrowers who want to enjoy the moratorium on loans have to start contacting their banks.

It marks a phase for banks to start assessing the risk of bad loans in their portfolio.

Banks have generally been preparing for this phase of restructuring and rescheduling loans since May this year.

It is estimated that there are some three million accounts that would likely need some assistance for a restructuring and rescheduling of the loans.

The three million accounts have been shielded so far, thanks to the moratorium that kept the economy afloat. It prevented foreclosures and delayed the painful process that borrowers and banks will need to undergo.

As said by Aurodeep Nandi, an economist with Nomura of India, a debt moratorium is akin to hiding a body under the carpet.

“Sure you can’t see it, but the body is still there.

And at some point you’re going to have to deal with it, ” he was reported to have said.

For individuals, their loans are largely tied to houses and cars. Among the two asset classes, car loans are most vulnerable to going into default mode.

When times are, cars are the least important for households, especially for those with more than one vehicle parked at their garage. Without a car, one can still be mobile. But without a house, one cannot sleep.

A car is a depreciating asset while a house appreciates over time, even if it is located in an out-lying area far from the city lights.

Considering the economic slowdown, the incentive to continue with a car loan repayment is less for an individual compared to a house.

Logically, if a person can sell his or her car at a minimal loss, one would tend to consider the option seriously.

This is because they would have used the car for “free” for the past six months, thanks to the moratorium.

Taking a small loss from the sale of their vehicle, makes up for the six-months of moratorium on hire-purchase payments that they enjoyed.

Moreover, most car companies have excess stock due to the slow sales of cars.

Discounts of up to 10% are on the table for prospective buyers. There is no sales tax and some companies are even throwing away the commission due to the salesman to clear stock.the trickle-down effect is already being felt at the secondary car market where a lot more cars are up for sale than previously. Even companies are selling the Mercedes Benz and opting for a cheaper model to conserve cash-flow.

The total industry volume (TIV) for the car industry has picked up from May this year on the back of higher sales.

The government doing away with sales tax helped drive the numbers.

Whether the trend would continue is left to be seen because people are still cautious.

In the next few months, as the blanket moratorium is lifted, only then would we know the extent of damage the Covid-19 lockdown has caused on the economy.

Apart from borrowers, the focus will be on banks, their financial ratios and how much leeway they can get from Bank Negara from complying with the internationally acceptable financial standards.

If the repayments do not come in as expected, the risk ratios of banks will increase, hence hindering their ability to lend out more money.

A situation where banks stop lending is something that would bring the economy to a stop again.

The views expressed are the writer’s own.