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Monday, October 3, 2022
HomeNewsBank Negara explains why banks couldn't afford to waive interest for loans...

Bank Negara explains why banks couldn’t afford to waive interest for loans despite moratorium

Bank Negara Malaysia (BNM) said today, financial institutions cannot waive interest payments on loans that will accrue during the ongoing six-month moratorium as there will be serious after-effects for the country’s economic recovery from the Covid-19 pandemic in the long run.

BNM governor Datuk Nor Shamsiah Mohd Yunus explained that profits earned from accrued interest during the loan moratorium are meant to cover the funding costs of banks.

This includes interest payment on deposits and other borrowings of funds by banks to fund the loans they provide.

“So waiving accrued interest payment on all individual and business loans under the moratorium will have significant long term consequences.

“Let me put things in perspective, interest income accounts for 80 per cent of bank revenues and total individual and SME loans that are eligible for auto moratorium accounts for close to RM1.4 trillion.

“So there are serious ramifications if banks were to waive accrued interest given their critical role in the economy,” she told an online news conference after releasing the report of Malaysia’s Economic Performance Second Quarter 2021.

Many Malaysian businesses have been hard hit by repeated lockdowns that were supposed to slow the spread of the disease, and are struggling to repay their borrowings.

Nor Shamsiah was asked if banks could consider a waiver on the interest payment for loans.

Explaining further, she said it is very critical for banks to remain sound and painted possible scenarios for the country’s economy if the financial institutions were hit.

“Firstly, banks will pull back on lending to conserve their buffers, especially with higher credit losses still expected to emerge.

“Their own credit rating may be downgraded to reflect weaker future earning capacities and make it more expensive for banks to raise capital and this higher cost will be passed on to borrowers.

“Confidence in banks will be affected and this could trigger liquidity stress and depositors may have concerns about the safety of their deposits and this action will also jeopardise depositors’ interest when the earnings of banks are adversely affected.

“Banks will also not be able to pay dividends to their retail investors and institutional funds that hold public savings ― such as EPF, KWAP, PNB, LTAT and Tabung Haji ― and this will result in lower return to depositors and retirement savings,” she said.

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