KUALA LUMPUR (May 4): Heated debates transpired over the weekend on whether banks should charge additional interest on deferred payments for fixed-rate financing loans, including hire purchase, during the six-month automatic moratorium period.

On Saturday (May 2), Finance Minister Tengku Datuk Seri Zafrul Aziz suggested that financial institutions waive any accrued interest or profit imposed throughout the moratorium.

A day later, government-owned Agrobank, which is under the purview of the Minister of Finance Inc, announced it would do exactly that for all eligible individual and small and medium enterprise (SME) customers during the six-month moratorium period.

Should other banks follow suit? What will the implications be on the banks if they do?

A seasoned banking analyst who declined to be named said fixed rate financing loans account for about 20% of banks’ total loan value, as the majority of loans are based on the floating rate. 

And based on automotive loans exposure, he said Affin Bank Bhd and Public Bank Bhd will be the ones most affected should the waiver of additional profit charge on fixed-rate financing materialise. However, he thinks the effect will be minimal, compared with the banks’ overall performance. 

So, banks in general do have the financial capacity to absorb such a waiver, though they will have to incur modification loss to their books at a later date, he added.

Similarly, MIDF Amanah Investment Bank analyst Imran Yassin Md Yusof is of the opinion that such a waiver will not have a significant impact on banks’ earnings.

“One thing we have to recognise is that the profit charged here is additional as the principal is not pared down during the moratorium. Secondly, the [banks'] portion of fixed loans is lower compared with floating-rate loans,” Imran said.

Besides Affin and Public Bank, AMMB Holdings Bhd (Ambank) is another local bank with a higher proportion of fixed-rate loans relative to its total loan exposure, according to a research note posted by CGS-CIMB analyst Winson Ng today.

Ng, however, also said banks with higher fixed-rate loans may fare better in sustaining their net interest margin (NIM), should there be another 75 basis point cut to the overnight policy rate (OPR), which would bring the full-year rate cut to 125 bps.

“Among the banks under our coverage, the earnings cuts were the smallest for three banks, with the average reduction in FY20-22F net profit of 5% for AMMB, 6.5% for Public Bank and 7.2% for Affin Bank. [This was] mainly due to the fact that, based on our assessment, the OPR cuts would have the smallest impact on the net profit of these banks, compared with their peers. [This was] mainly due to relatively lower floating-rate loan ratios for these banks, compared with most of their peers,” Ng wrote.

Should banks decide to waive these additional profit charges, it would be a commendable action as it will provide breathing space for consumers by reducing their financial burden, said RHB Research Institute chief Asean economist Peck Boon Soon.

However, do not expect there to be any boost to private consumption from such a move, Peck said, as fears of getting out and about, together with concerns about job security, will continue to cast a pall on consumption.

Socio-Economic Research Centre executive director Lee Heng Guie concurred with Peck's view, adding the outlook for employment has not been promising, as the number of people reporting loss of jobs and seeking aid under Socso's Employment Insurance Scheme (EIS) rose substantially in March, even before the Movement Control Order (MCO) to contain the spread of Covid-19 was implemented.

And the recovery in consumption post-MCO may take some time, especially since there may now be a structural shift in spending behaviour due to the “new normal” of social distancing that merchants have to adapt to.

The real test of the economy is when the loan moratorium period ends, and borrowers need to resume servicing their loan payments, Lee said.