According to EMIR Research, the overwhelming uptake and benefit to the many in the backdrop of a potentially grave economic outlook suggest loan moratorium 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,” the independent think-tank said in its ‘Exit Strategy Building Blocks for Malaysia - Part 1’ research note.
It said 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 or 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 said.
"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 due to re-evaluation of their outstanding loans,” EMIR Research said.
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 and banks would lose in terms of PV by postponing their collections to a later period.
Receiving the repayment later than initially scheduled could affect the banks' capital adequacy ratio whereby it has to increase its provisioning for possible loan default, which represents an opportunity cost to the bank.
"In 2019, loan loss coverage stood at 90 per cent and in 2020 this increased to 140 per cent. However, this doesn't in any way affect profits,” it added. - Bernama