The loan moratorium cannot be extended. Here's why.

By Zaidi Isham Ismail

The loan moratorium extension has been a hotly debated issue ever since it was announced earlier this year.

Polemics over the matter became more intense when the moratorium ended and there were calls by former prime minister Datuk Seri Najib Razak for it to be extended by another six months. 

Bank Negara Malaysia Governor Datuk Nor Shamsiah Mohd Yunos said the loan moratorium cannot be extended anymore as it will be detrimental to the country's economy.

Let's take a look at some of its repercussions.

Banks could weaken over the long term

We are fortunate that during this pandemic, Malaysian banks - all ten of them are as solid as a rock.

At a time when a lot of businesses have closed down, banks such as Maybank, Public Bank and CIMB continue to soldier steadfastly on.

Banks is one of the country's economic backbone.

If banks collapse, it will trigger disastrous consequences to the country as witnessed by the regional economic crisis in 1997 which saw some neighbouring countries turning to the World Bank and International Monetary Fund for financial assistance.

Although the banks liquidity is high, a prolonged moratorium extension could spell disaster for the country.

Banks need to have a financial buffer

Malaysian banks are solid and robust because they have a solid buffer.

This buffer or cash reserves will shelter banks in the event of an economic downturn such as COVID-19.

What this means is, if the bank has a buffer of for example RM1 trillion, COVID-19 will only erode its buffer by RM100 billion over a period of 10 months.

However, if the pandemic is prolonged, the buffer zone will be depleted until it reaches alarming low levels.

This buffer cannot be topped up again that easily as the rakyat cannot pay their loans as they have lost their jobs.

Thus, that is why banks buffer should never dip drastically to a catastrophic level for the country.

As a benchmark, Bank Negara itself has its own reserves of more than RM400 billion to protect the ringgit and the economy.

Banks cannot give out loans

Bank loans is one of the engines of growth for the country's lenders.

Money is the engine oil which lubricates the financial sector and without it, the engine will stall.

Thus it is important to keep the engine of the financial system liquid and flush with cash.

Loan moratoriums and its extension will only seize up the financial engine.

Loan moratoriums distort the real situation

The rakyat receive petrol subsidies and as a result they buy petrol much cheaper compared to the actual market prices in the global markets.

Subsidies is not good as it distorts the actual situation on the ground.

It is the same situation with loan moratoriums which paint a false rosy picture for the borrower.

By postponing loan payments, borrowers might have more cash in hand but in actual truth, their debts are growing and growing.

So the actual situation is distorted and this is not good for the financial system.

Household debt is already high

According to Bank Negara, the rakyat's household debt is already high at 90 percent.

If it goes any higher, the borrower will collapse under the debt which will snowball into other problems such as high unemployment rate.

Household debt refers to total loan that a person owes to the bank such as housing, car, personal, credit cards and others compared to the income.

In a situation like this, it is always prudent to have a low household debt to ensure economic sustainability.

Unfair to other depositors

Banks safeguard the savings of all Malaysians and it will be unfair to them if their interests are compromised to accommodate those who opt for loan moratoriums.

Banks have to sustain and ensure financial stability for the whole country.

As harsh as it may sound, It would be unfair for the banks to bend backwards too much.

The overall general health of the banking system needs to be preserved over a few to ensure that the country remains resilient and robust amid COVID-19.  -   DagangNews.com

The writer is former NST Business assistant editor