COMMENT | The case for an automatic six-month loan moratorium

COMMENT | Emir Research would like to refer to our “Exit Strategy Building Blocks for Malaysia – Part 1”, where under goal number two of extending social and business safety nets, the first objective is a loan moratorium for all micro, small and medium enterprises (MSMEs), B40 as well as M40 households while targeted for other individuals for at least three months or 50 percent loan payment reduction for six months. However, the overwhelming uptake and benefit to the many in the backdrop of a potentially grave economic outlook suggest this to be extended to six months of automatic blanket loan moratorium.

The aim is to provide a safety net to those at risk due to the shutting down of economic activities and prolonged unemployment. It is worth mentioning, a real moratorium that assists borrowers should have no room for the practice of charging borrowers an additional interest for the period of moratorium by re-amortising the loan payment schedule once the moratorium period is over. Under this practice, the total interest portion collection (profit) of which banks forego during the moratorium period is added to the beginning balance and thus result in a monthly instalment amount higher than the pre-moratorium one .

It has to be re-emphasised that the borrowers have not defaulted on their payments - the payments were merely postponed - and, provided the borrowers resume and finish all the payments according to the schedule, banks would not lose their real profits.

Although, banks would report some mere accounting losses (“day one” modification losses) due to re-evaluation of their outstanding loans. Under the International Financial Reporting Standards (IFRS 9), the banks have to show the fair value of the loans in their books based on the present value (PV) formula. Therefore, the fair value of the outstanding loans will reduce due to the newly extended period by the moratorium.

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