Hire-purchase loans and fixed-rate Islamic financing will now have additional interest charges during the 6-month moratorium. Both loans currently will not have any additional interest charges, but Bank Negara Malaysia (BNM) and the Association of Banks Malaysia (ABM) have announced changes that will be effective tomorrow (1 May 2020).
Both loan types are flat-rate, where interest charges are calculated upfront. The 6-month moratorium means that customers enjoy an interest-free payment holiday from April to September 2020. With both ABM and BNM’s announcement, this will no longer be the case.
Moratorium no longer automatic opt-in for hire purchase loans & Islamic financing
In a press release by the central bank today, BNM hinted of a major u-turn 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 has changed.
This comes after BNM required 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 charges to be introduced to 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 agreement saw no changes to the payment terms 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 as before. However, borrowers will need to fork out seven months’ worth of instalment in October 2020 (six months from April to September 2020, and 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.
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.
As a follow-up, ABM has announced that any deferred 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. This practically means instead of a six-month moratorium, hire purchase and Islamic financing borrowers will “only” enjoy a two-month payment holiday 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 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!
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