Understanding the ‘cost’ of suspending loan repayments

Many Malaysians appear to be in the dark over the concept of bank loan moratoriums despite the government introducing such initiatives several times since the onset of the pandemic early last year, to cushion the financial impact of the Covid-19 crisis.

The latest moratorium, announced by then prime minister Muhyiddin Yassin in June, entailed an unconditional six-month freeze on bank loan repayments for all income groups, from the B40 to the T20.

Announcements on Bursa Malaysia have shown many banks recording a more encouraging financial performance for the first half of 2021 compared to the same period last year.

Maybank, for example, posted an increase of 45.57% to RM4.35 billion as of June 30 from RM2.99 billion recorded last year.

CIMB meanwhile saw a four-fold increase, leaping to RM3.54 billion from RM785 million, while Public Bank rose from RM2.33 billion to RM2.91 billion.

This led to calls by some for the elimination of accrued interest, which they said would burden those who opted for the moratorium.

Proponents of the move refer to Bank Negara Malaysia’s explanation that through assistance for loan repayments, the cost of borrowing will increase overall as interest or profit will still be taken into account for the outstanding loan repayment.

Bank Islam Malaysia chief economist Mohd Afzanizam Abdul Rashid said such calls might be driven by confusion over the concept of moratoriums and the meaning of accrued interest.

Speaking to MalaysiaNow, he said many view accrued interest as an additional charge when it is in fact the income of the bank that cannot be collected during the moratorium period.

“We need to understand that a banking company is also a business. There will be costs and profits.

“Costs can be said to be principal loans, and profits are benefits,” he said.

If there is accrued interest, he said, it will be collected by the bank first.

“The implication is that when the loan period expires, there will be a principal loan balance.”

Afzanizam said the size of the principal loan balance depends on the loan period and amount, as well as how much moratorium is taken by the borrower.

“The more moratorium is taken, the higher the principal loan balance. If paid in a lump sum, it will be a large amount,” he said.

“This is why banks extend loan periods, so that borrowers are not burdened with payments.”

In addition, he said, moratoriums are only to defer payment.
Afzanizam said the price agreed on is the principal loan amount combined with the interest on the loan contract signed by the borrower.

Asked his view on whether moratoriums were likely to be given again in the future, Afzanizam said they would likely be given through a targeted approach.

“If there is another moratorium after December, it might be given on a targeted basis,” he said.

“Even though the economy will increasingly rally through the achievement of herd immunity targeted for October, it will take time to fully recover.”