Implications of an extension on the loan moratorium

Borrowers and banks are bracing themselves for the worst now that the country is experiencing it’s third wave of Covid-19 cases. (Rawpixel pic)

All things considered, Malaysians are pretty lucky when it comes to financial support amid the worldwide battle against Covid-19.

Our government and Bank Negara have meted out helpful loan moratoriums to provide relief to families and individuals struggling with job losses and pay cuts.

Other countries have opted not to do so, or are not implementing it as well as Malaysia.

That being said, here are certain things that borrowers need to take note of.

Accrual of deferred interest and risk of extension

Ever since the Movement Control Order (MCO) took effect, various financial institutions have offered a six-month deferment of loan repayments to eligible individuals and SME borrowers to ease their cash flow during the pandemic.

However, this move has its drawbacks.

The interests on deferred repayments will continue to accumulate, and borrowers will still need to honour these deferred repayments in the future.

Loan balances will also grow over time due to the deferment, resulting in higher debt repayment. In other words, there will be an increase in total borrowing costs.

Once the deferment period ends, and full repayments resume, borrowers will feel the pinch as they would either have to repay a higher amount of monthly instalments or extend the loan tenure.

For this reason, borrowers who can afford to resume monthly repayments should do so after the moratorium ends for their own benefit.

Although the sixth-month moratorium ended on Sept 30, extending the moratorium to borrowers who are able to resume full or partial repayments could cause moral hazards by incentivising them to use the extra cash for other purposes.

It would also delay the assessment of a borrower’s financial condition for banking institutions to provide appropriate repayment options to ‘serious borrowers’. It could even lead to the unintended ever-greening of businesses that are not viable.

Discuss all your loan repayment options with your bank. (Pexels pic)

Applying for targeted extension repayment moratorium

Some borrowers may continue to experience cash flow pressures amid the pandemic, especially during Malaysia’s third wave of the coronavirus outbreak.

Banking institutions and the Credit Counselling and Debt Management Agency (AKPK) are offering targeted extensions of repayment moratorium as well as other repayment flexibilities to give to borrowers, based on their specific financial circumstances.

This targeted approach will provide further relief to households and SMEs facing financial constraints. It will also encourage them to resume loan repayments to the best of their ability and avoid accumulating too much debt.

This same approach also ensures that more liquidity and resources will be available for financial institutions to continue providing aid to other households and businesses — a crucial strategy in supporting the country’s economic recovery.

Borrowers who continue to experience financial hardship can discuss alternative repayment arrangements with their respective banks or even AKPK.

Your Central Credit Reference Information System (CCRIS) report will not be adversely affected if your loan or financing account is still performing in arrears for 90 days or less at the point of targeted repayment assistance application.

That being said, targeted repayment assistance varies on a case-to-case basis.

As an example, Mr B is suffering from a total loss of income with his business temporarily closed. His moratorium arrangement details that he would only be required to start repaying interest three months after his application is approved, which is in January 2021.

This arrangement would continue for the next nine months before Mr B is required to resume his original repayment with interest. This way, Mr B’s monthly repayment is reduced from RM2,446 to RM1,300.

A visual illustration of Mr B’s restructuring plan for target repayment assistance. (‘Still Not Too Late’ webinar by Bank Negara Malaysia pic)

Conclusion

Those who are able to resume paying your loans, should do so for their own benefit. For those still experiencing financial pressure, it is never too late to seek assistance from their respective banks or AKPK.

John Chan Ninyii is a Licensed Financial Adviser with YES Financial Sdn Bhd.

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