By Dr Yii Kwang Jing
The Malaysian government implemented Movement Control Order (MCO) on 18 March 2020 as a preventive measure against the COVID-19 pandemic. The ‘lockdown’ also induced the closure of all industries, except for infrastructure services, supermarkets, wet markets, and multi-functional stores selling daily necessities.
The entire national economy was tremendously affected by a significant upsurge in unemployment rate and many businesses as well as individuals lost their incomes. The ongoing continuance of the MCO was regulated in the form of Conditional Movement Control Order (CMCO) on 4 May 2020, followed by Recovery Movement Control Order (RMCO) from 10 June to 31 August 2020.
During this difficult time, the banks played an important role in providing cash flow support to the needy. To diminish the negative economic impacts of the pandemic, the Government and Central Bank of Malaysia (BNM) reached an agreement with all banks to grant an automatic six-month moratorium to all individuals and Small & Medium Enterprises (SMEs) related to loans or financing repayments from 1 April 2020.
In the case of credit card debts, the outstanding balances could be converted into a 3-year term loan with reduced interest rates to assist borrowers to better manage their debt. Meanwhile, the banks also provide appropriate time-bound repayment flexibility so that borrowers would not have their reports in the Central Credit Reference Information System (CCRIS) affected.
Most recently, the targeted loan moratorium and repayment flexibility have been extended for borrowers who continue to be financially affected by the pandemic. Individual borrowers who experience loss of employment and income are allowed to extend the moratorium for three more months through an application of repayment flexibility subject to the banks’ approval. Moreover, individuals who are affected by salary reduction could also apply for a reduction in their loan instalment amounts for at least six months in proportion to their salary reduction.
For other borrowers, including SMEs, whose viable businesses may have suffered from cash flow problems or were facing difficulty to repay loans, three types of repayment flexibility are offered. They can pay only loan interest for a specified period, reduce monthly instalments by extending the loan period, and agree to other flexibility until borrowers could resume full repayment. In addition, the affected borrowers are also offered revised instalment schedules on hire purchase agreements in line with the Hire Purchase Act 1967 without any impact on their CCRIS credit reports.
However, as banks’ sources of funding are primarily deposits, borrowed capital and shareholders’ funds, the loan moratorium and repayment flexibility might cause insufficient funds for the banks’ primary functions such as providing loans and investments. The banks also require funds in the form of defensive assets and reserves, so as not to trigger liquidity risk in the banking sector.
The impacts of the pandemic may be directed to the banks in terms of reduced loan growth, earnings, provisions, and liquidity. Moreover, the banks may encounter a critical challenge in relocating their newly designed distribution channels due to the introduction of social distancing and compliance functions. The banks should also be aware of their revenue relevant to the brand issues as market forces and customer behaviour may potentially change as a result of the pandemic.
The effects and aftermath of the COVID-19 pandemic are expected to be felt far beyond the end of the MCO period. Therefore, the banking sector should consider significant macroeconomic parameters such as unemployment rate, interest rate and inflation rate and the short and long-term economic outlook to design more comprehensive post-COVID-19 financial assistance continuity plans.
Besides, the banks should rethink the balance sheet challenges such as monitoring deposit fluctuations, looking for opportunities of refinancing existing debt, raising new funding at attractive rates, and revising their planned capital actions. Furthermore, the bank’s business models should be adapted based on the new customer norms, considering social changes such as channel preferences, products and financial needs. In a nutshell, these actions would complement the government’s strategy to support vulnerable communities should similar crises occur in the future.
Source: Bank Negara Malaysia (BNM)
Dr Yii Kwang Jing is a lecturer at the School of Business at Swinburne University of Technology Sarawak Campus. He can be reached via email at KYii@swinburne.edu.my.