(Update 1/5/2020 12.00pm: Article headline and body has been updated for clarity)
(Update 1/5/2020 11.30am: Article has been updated to include statements from BNM’s FAQ issued on 1 May 2020)
(Update 30/4/2020 11.30pm: Article has been updated to include a new statement from BNM)
Hire-purchase loans and fixed-rate Islamic financing may now be charged interest on instalments deferred during the 6-month moratorium in Malaysia.
The 6 month instalment deferment would not have incurred interest charges according to BNM’s own FAQ dated 30th March 2020 (and similar FAQs of many banks in Malaysia), but Bank Negara Malaysia (BNM) and the Association of Banks Malaysia (ABM) have announced changes on 30th April 2020, and BNM additionally issued a FAQ on 1 May 2020 to explain changes to the previous understanding.
Both loan types are flat-rate, where interest charges are calculated upfront. The 6-month moratorium FAQs initially indicated that customers enjoy an interest-free payment holiday from April to September 2020, with no subsequent changes to the existing instalment amount or remaining number of installments. Also, there was previously no need to consumers to take any actions with their banks if they wanted to opt-in to the moratorium (ie. automatic opt-in). With both ABM and BNM’s announcements on 30 April 2020 and 1 May 2020, both of these will no longer be the case.
We expect most banks to issue updated FAQs in the coming days and will update our guide on whether you should take the 6-month moratorium accordingly.
Moratorium no longer automatic opt-in for hire purchase loans & Islamic financing
In a press release by the central bank today, BNM stated that it has begun the “operationalisation” of the moratorium agreement to comply with the procedural requirements under the Hire-Purchase Act 1967 and Shariah requirements. According to BNM, this exercise is necessary to facilitate the moratorium that was announced as part of the Prihatin Economic Stimulus Package, giving it full legal effect.
The press release also hinted of a big change that will affect millions of Malaysians currently servicing car loans or Islamic financing. According to the press release, BNM implied that from 1 May 2020, the 6-month moratorium will no longer be an automatic opt-in for all customers – a huge hint that the terms of the original moratorium may have changed.
The press release further adds that BNM required that all borrowers “are provided with clear information on the process and changes to the terms of their agreements”, and that the banking institutions provide borrowers with “necessary steps that they need to take to complete the process of deferring their loan/financing payments”.
Interest/profit charges to be introduced to deferred instalments on fixed-rate loans/financing
The press release further hints that it is opening the doors for banking institutions to tweak the terms of each borrower’s loan/financing agreements during the bank moratorium. In the press release, BNM states that:
Banking institutions will also provide to each borrower/customer specific details of changes to the terms of his/her HP loan or fixed rate Islamic financing agreement. This should contain information on the revised payment schedule and any changes to payment amounts, including those arising from normal interest/profit rate accrued during the moratorium.
Given that the original moratorium FAQs indicated no changes to the payment terms (same instalment, same remaining amount of instalments) for fixed-rate loans and financing, the excerpt above greatly implies that this will no longer be the case.
The ABM has also released a statement today, confirming changes to the moratorium agreement. According to ABM, banking institutions will provide borrowers with two options at the end of the moratorium:
- Pay the accumulated 6 months’ deferred instalments together with their October 2020 instalment without being charged any additional interest; or
- Continue the repayment of these instalments post-October 2020 through an extension of 6 months in repayment period after the original maturity date. In this case, interest based on the contractual rate will be charged on the amount of the deferred instalments that remains outstanding until these instalments are fully repaid, which should be by the end of the extended 6-month tenure.
Obviously, in the first option, there is no additional interest to be charged, and the repayment terms and schedule remains the same after October. However, borrowers will need to fork out seven months’ worth of instalment in October 2020 (six months from April to September 2020, as well as October 2020).
For the second option, borrowers will see interest charged to the six monthly instalments that were deferred throughout the remainder of the tenure, and the tenure will be extended by six months. This will mean borrowers will see an increase in their monthly instalments from October 2020. BNM’s new FAQ dated 1 May 2020 has a sample calculation which explains this, we will be running analysis on this in our main moratorium guide.
For Islamic financing, the Association of Islamic Banking and Financial Institutions Malaysia (AIBIM) has also released a press statement, saying that customers will be contacted directly about any possible changes to their financing plans. Unlike ABM’s statement, no specific information such as revisions to profit rate were mentioned in AIBIM’s press release.
In a new statement, BNM reiterated that it had previously explained that interest will continue to accrue during the moratorium and should take that into account before choosing to opt in for the deferment. It also added that those who do not wish to take the moratorium will be given the opportunity to do so even if they have opted in previously.
No penalty for those who wish to opt out of deferment from May 2020
BNM also stressed that there will be no penalties for borrowers who have already deferred their loan repayments, and wish to opt out of the moratorium. According to the central bank, borrowers simply need to inform their banking institutions that they wish to resume their scheduled payments following the existing agreement.
From there, banking institutions must provide borrowers “reasonable time” to regularise any outstanding scheduled payments that were earlier deferred under the moratorium. In addition, BNM has expressly stated that banking institutions are not to impose overdue or late payment charges on the deferred payments if they wish to opt out of the moratorium. These charges may only apply if borrowers fail to adhere to the revised payment schedule after opting out of the moratorium.
In its statement, the ABM announced that any deferred hire purchase instalment payment for April, May, and June 2020 will not be imposed any interest charges nor late payment fees – as long as the instalments are paid by 30 June 2020 and the customer chooses not to take up the moratorium having opted in previously. This practically means instead of a six-month moratorium, hire purchase borrowers who previously opted in and now choose to opt out of the moratorium will “only” enjoy a de-facto two-month payment holiday (April – May 2020) with no interest charged.
Banks stand to lose billions
Sources in the banking industry revealed to RinggitPlus that the 6-month moratorium will result in huge losses for banks. Banks will see zero revenue from this business vertical during this period, which will lead to a ripple effect to the bank’s ability to finance operational and funding costs across the entire business. According to one source, a big bank could stand to lose up to RM1 billion during the 6-month moratorium from just the deferment of hire purchase loans alone.
It is unclear why the original moratorium was passed given the huge hit banks will take as part of the exercise – the short timeline (banks were reportedly informed just a few days before Prime Minister Tan Sri Muhyiddin Yassin’s Prihatin Economic Stimulus Package announcement) may have been one factor.
The reversal of the “payment holiday” means Malaysians currently servicing hire purchase loans or Islamic financing will need to recalibrate their finances for the coming months before deciding whether to opt in or out of the new moratorium agreement.
Now that interest may be charged to deferred instalments for hire purchase and fixed-rate Islamic financing, we will be updating our guide on whether you should take the 6-month moratorium for these loans. Stay tuned.