Bank Should Offer More Than Just Moratorium

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History of Banks & Loan Creation

In early Mesopotamia and medieval period, Banks began with the initial purpose to facilitate record keeping of trades. Merchants would store and keep their harvest with Banks and these Banks would lend out the seeds to other farmers. In return, the assisted farmer would return the equivalent seeds once crop is harvested.

Banks then underwent a big revolutionary change in early 17th century becoming a depository or a vault for precious metals especially Gold. These Banks or “Goldsmiths” charged an administrative fee to safekeep one’s Gold.

In order to track and record such transaction, a “value receipt or promissory note” was exchanged as confirmation and proof of exchange.

Eventually, these value receipts or promissory notes were used as a mode or instrument to transact instead of the actual Gold, leading to the creation of what we now know as bank notes or paper money.

These bank notes or paper money continued to be circulated and exchanged whereas actual Gold did not.  Goldsmiths continued to leverage by printing more and more fictitious value receipts or promissory notes and offered as lending.

What is a loan and how is a loan created? A simple explanation is outlined below with reference to the Goldsmiths nature of business.

Example:

  1. Two separate individuals deposit and place their respective gold bars for safe keeping with the Goldsmith. The Goldsmith now has 2 gold bars.
  2. A third individual seeks financial assistance from the Goldsmith. The Goldsmith only has 2 gold bars and has issued 2 value receipts respectively to previous 2 individuals.
  3. A new fictitious value receipt or promissory note is created and offered to the borrower with hope that the earlier 2 individuals do not withdraw their gold bars.
  4. In order to make profit when lending, the Goldsmith adds interest charges on top of the actual repayment amount and allows the borrower to pay via instalments.
  5. Whenever the borrower is late in repayment, the interest is compounded and accumulates interest what is known as “interest on interest”.

Modern Day Banking

Nowadays, when you take a loan with commercial bank, no actual or physical value receipt or paper money is exchange or provided.

Banks merely update the approved loan amount as a literal figure in your Bank Account without any exchange of value receipts or bank notes.

Instead of receiving physical cash, the entire process is simply recorded as an Accounting entry as such:

Dr Bank Account        (ASSET)

Cr Loan Deposit Account      (LIABILITY)

In essence, it is totally unfathomable and ludicrous that the borrower owes the Bank for money the bank does not even have to begin with. In return, modern day society continues to be plagued by debt through this “unreal” financial economy.

Loan Moratorium

Since the COVID-19 outbreak in earlier 2020, Malaysia has undergone numerous iterations of the MCO, CMCO, RMCO etc and now the most recent FMCO. Many Malaysian livelihoods are struggling to survive,

Banks were called to action by offering a second loan repayment deferment exercise or moratorium to borrowers. Recently Bank Negara Malaysia (BNM) has stated that interest will still accrue during the moratorium period.

Borrowers are advised that opting for repayment assistance will increase the overall cost of borrowing, as interest/profit will continue to accrue on deferred payments.

In short, you will not be penalized as there is no compounding of interest “interest on interest”. However, if you do not pay now, you will end up paying more in the extended period due to the interest accrued during the 6 months moratorium

Example:

Before Moratorium

  • You have a loan with an interest rate of 12% per annum, you would roughly be accruing interest at a rate of 1% per month. So, if you took a personal loan for RM10,000, the total amount that you need to repay would increase at a rate of RM100 per month.

During Moratorium

  • You do not pay any repayments temporarily for 6 months however the RM100 per month interest is chargeable and accrued thus, you will eventually need to pay additional RM100 x 6 months = RM600 after the moratorium ends

After Moratorium

  • Your 6 months moratorium repayment that is due is added back to your loan tenure plus the RM600 extra incurred accrued interest. When and how it is paid back is subject and differs from bank to bank.

Malaysians in Distress

Between March and May 2020, the helpline of the Befrienders KL received 6,858 calls from people who were distressed and needed emotional support. For the same period this year, the number of calls has shot up to 10,412 more than a 50% increase.

Nationwide, 468 suicide cases were reported for the first five months of 2021. Such cases were mainly due financial constraints as a result from loss of income. For many, the anguish is so unbearable which in severe circumstances have even led to taking their own life.

With savings dwindling due to the lockdown, an employer from the M40 income group says he would rather fail to service his loans and be blacklisted by financial institutions than see his family starve as he was forced to spend all of his savings for the past year as he had no other source of income.

With the prolonged movement control order, thousands of businesses have shuttered and more will follow suit. Financial constraint continues to plague lives and livelihoods.

Meanwhile, banks continue to prosper recording increased profits in the first quarter 2021 with Maybank 16.7% increased earnings YoY to RM2.39 billion, RHB Bank’s net profit rose 13.9% YoY to RM650.39 million and Hong Leong’s net profit jumped 44.2% YoY to RM771.46 million.

Thus, this is a strong call to action for Banks play a bigger and purposive role as part of their social responsibility. There must be urgency and sincerity in providing relief and assistance during these tumultuous times.

Ultimately, without borrowers Banks shall cease to function. Lest we forget, taxpayers had bailed out the banks previously during the financial crisis. Perhaps it is time this favour is returned.

Recommendations

Taking into account the various factors and clear depiction of how Banks and Loans function, the following are the salient points comprising the recommendations that should be implemented: –

  1. Offer unconditional blanket “genuine” extension or real moratorium without any accrued interest for 6 months as Bank’s do not incur any loses.
  2. Provide targeted 3 months debt repayment waiver “write-off” as part of corporate social responsibility justified by bank’s financial ability.
  3. Government and Bank Negara to utilize powers of legislation within the emergency ordinance in enforcing both the genuine moratorium and waiver.
  4. Mobilize GLCs and GLICs for direct fiscal injection for affected borrowers as part of their social responsibility exercise

References:

https://www.imoney.my/articles/bnm-moratorium-loan-repayment

https://www.malaysianow.com/news/2021/06/27/dire-need-for-blanket-loan-moratorium-think-tank-warns-as-mco-extended/

https://www.abm.org.my/consumer-information/loan-deferment

https://www.bnm.gov.my/-/six-mth-mora-begins-20210707

https://themalaysianreserve.com/2021/05/28/banks-earnings-recover-in-1q21/

https://www.fitchratings.com/research/banks/malaysia-moratorium-to-flatten-peak-npls-delay-profit-recovery-30-06-2021

https://themalaysianreserve.com/2021/07/01/468-suicide-cases-in-the-first-five-months-of-2021/

https://www.astroawani.com/berita-malaysia/suicide-hidden-danger-requires-more-attention-305089

Photo: The Malaysian Reserve

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