Loan moratorium and its impact on banks

10 Sep 2020 / 02:40 H.

    IN recent weeks, we see banks being vilified by politicians and on social media. In spite of a large drop in their second quarter earnings, there are people who say that they are still making profits and should therefore extend the loan moratorium across the board.

    This is despite the announcement that banks will be offering an extension of the moratorium in a targeted manner to those who are most in need, such as the unemployed.

    Let me state clearly that I do not work in a bank, and neither do I own any shares in banks. In fact, I have no love or sympathy for banks, as I’ve had my own fair share of complaints about banks, such as poor service. But as an accountant who has audited banks in the past, I believe that there are a number of facts concerning the business of banking which are often forgotten or ignored.

    First, banks have a duty to depositors. If borrowers do not repay their loans, how are banks able to honour deposit withdrawals? Just like any other business, banks need cashflow and liquidity. Likewise, if banks extend the moratorium across the board (on the pretext of helping borrowers), this raises plenty of questions around the asset quality of banks. Banks cannot tell which loans are good, and which are bad. Depositors have no idea whether their money is in safe hands.

    Second, Malaysian banks are owned by the people. Some people feel that banks are making too much profit. This is debatable (especially when we look at objective indicators like return on equity or price-to-book ratio). But let’s be clear – all our domestic banks are majority owned by Malaysians.

    In fact, government-linked investment funds such as Khazanah, EPF, PNB and Tabung Haji control or have substantial stakes in many banks. Even if individuals do not own bank stocks, all Malaysians are indirect shareholders of banks. If banks do not generate profits and declare dividends, how can these funds sustain the high returns which we all expect and enjoy each year?

    Third, the business of banking is about promises. In Latin, “credit” means “he believes”. If borrowers can simply walk away from their promise to repay their loans, or if the government can simply instruct banks to offer a moratorium, contrary to what’s provided for in loan agreements, this throws out certainty in contracts.

    If businesses and individuals have little trust and belief that the other party is going to honour his promise, then Malaysia is not a good place for doing business, and it will be difficult for the economy to grow. What type of society will we become, if we don’t subscribe to the adage of “my word is my bond”.

    Fourth, banks are like public utilities, providing useful and critical services to the economy. You need not like them and many people would rather not have to deal with them. But when they do not function as they should, the economy suffers.

    None of us hope for our public utilities to make less money. And while calls for “free water” and “lower electricity tariffs” are tempting, we all know that these are bad ideas.

    Proponents might say things like this will help ease the rakyat’s burden and lower the cost of doing business. Really? If anything, these measures promote wastage (a person with a moratorium on a RM300,000 car loan benefits more than one with a RM30,000 car loan), and they lead to the underinvesting in capacity and good service.

    Think about the number of water disruptions we have had in recent years because of how state water companies are operated.

    Finally, do we really want to harm and endanger the banking system that we have by throwing out good credit culture and discipline? Do we really want to follow in the ways of countries like Greece and Argentina which have gone through many banking and economic crises? Have we all forgotten about what happened to Malaysia during the Asian financial crisis because of weak banks?

    Yusof Hamdan



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