This article first appeared in The Edge Malaysia Weekly on August 3, 2020 - August 9, 2020

THE special tax treatment granted to banks for the loan moratorium they offer clients will help cushion the impact on their earnings, say bankers and analysts. Last Monday, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz estimated that the banking sector would incur losses of RM6.4 billion from the six-month moratorium period from April to September.

Two days later, Prime Minister Tan Sri Muhyiddin Yassin granted a further three-month extension on the moratorium for borrowers who lost their jobs this year and are still jobless. As for those who had their salaries cut, their monthly instalments for loans — such as mortgages and personal loans — can be lowered in tandem with the pay cut.

The extension of the moratorium and targeted help on certain loans are expected to have an impact on banks, but the actual amount will depend on the respective banks and the customers’ loan portfolio mix, according to bankers and analysts.

Some impact — of the blanket six-month moratorium and three-month extension to some borrowers — is likely to be cushioned by the special tax treatment on interest/ profit income from loans that has accrued during the moratorium period.  The interest/profit need not be recognised as income during that year of assessment, but only when actual cash is received when the loan moratorium ends.

Banking analysts say this provides banks with a buffer to a certain extent. “What this means is that banks will have space in terms of cash flow,” says one analyst at a foreign research house.

Tax experts concur.

Koh Leh Kien, partner at Ernst & Young Tax Consultants Sdn Bhd (EY), says the special tax treatment on the moratorium interest is part of the government’s efforts to ease the cash flow burden on banks by taxing the interest on a receipt basis.

How much of a buffer the tax treatment will provide to banks depends on the bank’s loan portfolio and the number of clients who have loans that have been granted the moratorium, she tells The Edge.

“We understand that, for some loans such as mortgages, the moratorium interest may be spread over the remaining tenure of the loan period, which can range up to 20 years,” she notes.

Jennifer Chang, tax partner at PwC Malaysia, says although borrowers do not need to make payments to the banks during the moratorium period, financial institutions continue to accrue interest income — even if that income has not been received — and this accrued interest income will be taxable.

“This impacts banks because payments are not made by eligible customers during the loan moratorium period. On top of that, banks have to bring the deferred interest to tax. Thus, to be fair to the banks, the government subsequently announced a tax concession for banks on the loan moratorium,” she explains.

Chang adds that the tax concession is basically to allow banks to defer the taxability of the interest income on such loans until they have received the interest income from customers. “Therefore, the deferment is a timing mechanism that allows the banks to bring the interest income on deferred loans to tax only when payments are received from customers.”

“This is a tax payment deferment, not a tax holiday,” a C-level banker says.

Practical challenges

While it is a good concession for the government to provide to the banks, Chang points out that it would be difficult to track every single customer administratively and to determine exactly when their payments would be made.

“What is important to note is that banks have potentially thousands of customers, and it is hard to say whether every single one of these customers would be able to pay the banks promptly as soon as the loan moratorium period comes to an end.”

She says it is important for the government to also consider a mechanism that is simple for the banks to administer for deferred interest to be brought to tax.

She adds that the government can consider allowing banks to accrue interest income from deferred loans over a period of a few years so that they can easily administer this tax concession.

She also brought up the recent guidelines issued by the tax authorities on the tax concession, where it was noted that any expenses relating to deferred interest income have to be disallowed for tax deduction purposes.

“Again, it is important not to unnecessarily burden banks with administrative work, as it would be challenging to track such expenses, if any,” she says.

EY’s Koh concurs, noting that the special tax treatment is challenging for banks, “as they are likely to incur a considerable amount of additional administrative and compliance costs”.

“There are practical challenges faced by the banks in segregating and tracking the moratorium interest, owing to the complexity of interest calculation across a range of loan products with different interest rates; options available to customers to opt out fully or partially from the deferment programme; and also options given to customers on how they prefer to repay the deferred instalments.

“Given these complexities, the banks’ IT infrastructure will need to be configured to track the moratorium interest separately, and additional resources will be required to monitor this, resulting in additional costs to the banks,” she says.

Also, Koh notes that, under the Malaysian Financial Reporting Standard 9 (MFRS 9), the overdue interest on deferred loan instalments waived by the banks will give rise to a one-off day-one modification fair-value impact.

“Given that the fair value has been recognised as income, theoretically, the day-one modification fair-value impact should be deductible for the banks,” she says.

Bank Negara Malaysia told banking analysts at a recent briefing that the day-one modification losses are a one-off adjustment because of accounting requirements and should not affect the long-term profitability of banks.

Last Monday, Affin Bank Bhd estimated that it would incur an RM80 million day-one modification loss in fixed-rate financing assumptions caused by the six-month moratorium on hire-purchase loans.

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