By John Chan Ninyii
We are so lucky to be Malaysian living in Malaysia during this moment of time battling the COVID-19 pandemic where our government and Bank Negara Malaysia are being helpful in coming out with the loan moratorium where not many countries out there are implementing it or may not be as good as what we are implementing here.
Accrual of deferred interest and risk of extension
Since MCO, financial institutions have offered a deferment of all loan repayments for a period of six months to eligible individuals and SME borrowers to ease their cash flow in battling the COVID-19 pandemic. However, it also comes at the longer-term cost of increases in overall financing costs.
The interest will continue to accrue on repayments that are deferred and borrowers will need to honour these deferred repayments in the future.
Loan balances will grow over time due to the accumulation of deferred interest payments, resulting in a higher debt repayment burden for borrowers once the deferment period ends. For this reason, borrowers who can afford to resume monthly repayments should do so after the end of the moratorium as it is for their best interests.
If the repayment moratoriums be extended to such borrowers, interest will continue to accrue during the extended deferment period resulting in increasing of their outstanding debt as well as total borrowing costs. When full repayments resume, these borrowers would either have to repay a higher monthly installment amount or extend the loan tenure.
While the blanketed six-month moratorium had ended on Sept 30, extending the moratorium to borrowers who are able to resume full or partial repayments could create moral hazard by incentivising such borrowers to use the extra cash for other purposes.
This could also bring negative impact in delaying the assessment of borrowers’ financial conditions in order for banking institutions to provide appropriate repayment options to ‘serious borrowers’. It could even lead to the unintended ever-greening of nonviable businesses.
Targeted extension repayment moratorium
However, some borrowers may continue to experience cash flow pressures amid the COVID-19 pandemic especially during the third wave. Banking institutions and AKPK are offering targeted extension of repayment moratorium as well as other repayment flexibilities to give such borrowers based on their specific financial circumstances.
This targeted approach would provide further relief to households and SMEs who continue to face financial constraints while encouraging them to resume loan repayments to the extent they are able to do so to avoid accumulating too much debt.
It also ensures that more liquidity and resources are available for financial institutions to continue providing new financing to households and businesses in supporting the country’s economic recovery.
Borrowers who continue to experience financial hardship could discuss alternative repayment arrangements with their respective banks or even AKPK. Your CCRIS report will not be adversely affected if your loan/financing account is still performing in arrears for 90 days or less at the point you apply for the targeted repayment assistance.
Target repayment assistance varies from case to case basis. An example of a moratorium arrangement of three months with paying of interest for the next nine months for a borrower suffering from total loss of income with their business temporary closed. Their monthly repayment installment reduces from RM2,446 to RM1,300. – Oct 22, 2020
John Chan Ninyii is a licensed financial adviser for YES Financial Sdn Bhd