In recognising that the Covid-19 impact is probably transitory, yet the impact of which can inflict lasting damage if not urgently addressed, BNM yesterday introduced much needed countercyclical measures. Sensible and timely, these critical pre-emptive measures cushion short-term stresses on the banking system, which if otherwise left on its own, might give way to larger systemic issues. It is precisely in recognising that the economic situation can normalise after Covid-19 comes to pass in a matter of months that the materialisation of that outcome must be enabled. And to enable that requires these very measures that BNM had the foresight to implement. Of course, there is still that remote chance that Covid-19 prolongs longer than it should - beyond this 6-month moratorium - in which case, credit costs will shoot up and the outlook for the entire economic and financial system would then be extremely dire. One hopes that the Covid-19 issue does really come to pass within the next six months, confidence restored and servicing of loans can take on its normal rhythm. In the meantime sceptics may point to prudential lending standards being compromised and call for some form of sector de-rating to price in heightened risk. But we see such a price worth paying to avoid a larger mess from developing.

In a letter to CEOs of licensed banks and DFIs, BNM informed that it was implementing measures to: i) Assist borrowers facing challenges servicing loans during this difficult period; ii) Ensure financial intermediation within the financial sector continues to function; iii) Ensure the banking system continues to focus on supporting the economy during this difficult period.

• Assist borrowers facing challenges servicing loans during this difficult period; Introduce moratorium on repayment/payment of loans/financing. To ease the cash flows of SMEs and individuals that are likely affected by Covid-19, banks will grant automatic moratorium on all loans, principal and interest (except credit card balances) for 6 months from 1 Apr 20 i.e. until 30 Sep 20. Moratorium applies only to loans that are: a) Not in arrears exceeding 90 days as at 1 Apr 20; and b) Denominated in MYR.

Our view: Here BNM was mindful of not giving indulgence to those who were already defaulters before the Covid-19 impact. Loans of those defaulters will be properly accounted for as impaired. Hence, the moratorium is meant to target only deserving borrowers who may be challenged financially in the short term, thereby avoiding a moral hazard.

While the above moratorium applies automatically to SMEs and individuals, corporate borrowers can request for a similar moratorium and banks are encouraged to grant them on the grounds of enabling viable corporates to preserve jobs during this difficult period and they would be able to resume business normally when conditions stabilise. This may include additional financial support and R&R of existing facilities to allow time for businesses to recover from current disruptions. And what would usually be categorised as non-performing loans, BNM decreed that loans granted a moratorium and those converted or under rescheduled and restructured (R&R ) (i) can exclude the moratorium period in the determination of period in arrears for regulatory and accounting classification; (ii) need not report them as R&R in CCRIS and (iii) need not classify them as credit impaired in CCRIS;

Source: Kenanga Research - 25 Mar 2020