Loan deferments over Covid-19 a win-win solution, say economists

Several banks in Malaysia are allowing customers who may be affected by the Covid-19 outbreak to defer their loan repayments. (Bernama pic)

PETALING JAYA: Two economists have described the move by several banks to allow customers who may be affected by the Covid-19 outbreak to defer their loan repayment as a “win-win” situation.

Mohd Afzanizam Abdul Rashid of Bank Islam Malaysia Berhad said banks will not be impacted through a higher loan loss provision, which is an expense set aside as an allowance for uncollected loans and loan payments.

This provision is used to cover a number of factors associated with potential loan losses, including bad loans, customer defaults, and renegotiated terms of loans.

Afzanizam said if there is a high chance of default, the loan loss provision will be higher which will be recorded in the bank’s profit and loss statement, which can affect a bank’s bottom line.

Therefore, he said, the move should have only a limited impact on banks.

“It will allow banks to preempt the risks of defaults, which means a loss of revenue for them,” he said.

On Sunday, Bank Simpanan Nasional (BSN) announced that its clients can apply for temporary deferment to repay their loans which could be affected by the outbreak.

RHB Banking Group and Maybank earlier announced that they are offering a moratorium of up to six months for monthly instalment payments of loans and financing.

Afzanizam said that last year, Bank Negara Malaysia gave banks the leeway to restructure and reschedule loans for small-medium enterprises (SMEs) to provide lenders with some breathing space in a challenging operating environment.

The central bank also did that to prevent loans from being classified as impaired in the Central Credit Reference Information System (CCRIS).

“These banks are adhering to BNM’s regulations at the right time.”

Ahamed Kameel Mydin Meera, former dean of the Institute of Islamic Banking and Finance at the International Islamic University, said deferment of loans will not cost the banks anything.

In fact, he said, they gain because for the period the client is not paying any instalment, the interest will still grow.

“The client will, therefore, take a longer period to pay back the loans,” Kameel said, adding that customers would benefit if the banks postpone instalments without charging interest for the deferment period.

He, however, does not see this trend of banks offering deferment catching on since Malaysian victims of the outbreak is quite small.