The Prime Minister of Malaysia announced on March 16, 2020 the imposition of a movement control order (“Order“) with the aim of controlling the Covid-19 epidemic, effective throughout the country, and was initially implemented for the period from March 18, 2020 to March 31, 2020, but this period was extended until 12 May 2020 (“Movement control period“). The Prime Minister then announced, on May 1, 2020, the lifting of certain conditions, most sectors being allowed to return and resume their activities. This order of conditional movement control (“CMCO”) Has been extended until June 9, 2020.
The Order and the CMCO have imposed heavy restrictions on domestic and international travel as well as bans on business activities during the period of movement control, resulting in huge losses in revenue for companies, forcing some to resort to layoffs and pay cuts. The Ordinance and CMCO have therefore had a significant effect on the ability of many individuals and businesses to comply with their financial repayment obligations.
On March 24, 2020, the Central Bank of Malaysia, Bank Negara Malaysia (“BNM”) Announced several measures to help borrowers or customers affected by the Covid-19 pandemic. These measures include:
- The granting of an automatic moratorium by banking establishments on all loan / financing, principal and interest repayments / payments (excluding credit card balances) for small and medium-sized businesses and individuals. This moratorium will take effect for a period of 6 months from April 1, 2020, provided that the loans and financing are: (i) not in arrears of more than 90 days as of April 1, 2020; and (ii) denominated in Malaysian ringgit. If a borrower or client wishes to continue with the repayment / payment terms established before the automatic moratorium, this should be allowed to continue with minimal inconvenience to the borrower or client.
- Facilitation by banking institutions of corporate borrower moratorium requests on loan / finance repayments that will allow viable businesses to retain employees and quickly resume economic activities when current conditions stabilize and improve.
- Requirements relating to financing or lending activities carried out by banking institutions in the wider real estate sector, the purchase of shares and units of mutual funds being immediately removed and the lending or financing limits for exposures counterparties related to Tenaga Nasional Berhad, Petrolium Nasional Berhad and Telekom Malaysia Berhad, in accordance with the economic dependency factors set out in the single counterparty exposure limit policy document, is temporarily increased from 25% to 35% of the total capital of the banking institution, subject to some requirements imposed by the BNM.
- Allow banking institutions to draw on the 2.5% capital conservation buffer, operate below the minimum liquidity coverage ratio of 100% and reduce regulatory reserves held against expected losses to 0%. In addition, the stable net funding ratio (“NSFR“) will still be implemented on July 1, 2020 with an 80% lower NSFR requirement applicable. Banking institutions will maintain a minimum NSFR of 100% from September 30, 2021.
- The BNM also announced other measures, namely:
- any new request for a statistical report, other than those necessary to deal with the impact of the Covid-19 epidemic will be suspended;
- flexibility in the deadlines so that banking institutions respond to the prudential concerns raised by the BNM;
- response times to published discussion papers and exposure drafts will be extended to June 30, 2020 and beyond;
- deadlines for regulatory, prudential and most statistical submissions should be extended; and
- enforcement measures for non-compliance with statistical reporting deadlines are suspended.
This article aims to discuss in particular on the modifications to the moratorium announced by the BNM specifically with regard to hire purchase loans, and the additional requirements for these.
Moratorium requirements on purchase and lease loans
On April 30, 2020, the BNM clarified that there would be an additional requirement that should be met with respect to sales lending and Islamic fixed-rate financing to ensure compliance with the 1967 law and the requirements of the sharia. BNM said changes to the payment schedule and amounts will need to be reflected in loan / finance agreements.
Subsequently, from May 1, 2020, borrowers / customers with fixed-rate Islamic credit and finance will receive notifications by SMS, email or registered mail from their banking institutions on the steps that need to be taken. to complete the process of postponing their loan / financing payments under the moratorium. Specific details on changes to the terms of the Loan-Sale or Islamic Fixed-Rate Finance Agreement, such as revised payment schedule, changes to payment amounts, will also be provided.
It should be noted that BNM has announced that despite the postponement of repayments / payments, interest will continue to accrue on it, and borrowers will have to repay such interest in the future. This has raised concerns among the general public, especially for borrowers who have taken out hire purchase loans, as payment amounts may increase as a result of continued interest accumulation during the moratorium period.
In response to fears and public feedback, on May 6, 2020, the finance ministry and banks, in agreement, announced that repayments on sales loans would remain unchanged after the end of the 6-month moratorium period. Amounts paid before the start of the moratorium period will remain unchanged, however, the total term of the hire purchase loan would be extended by an additional 6 months. The finance minister specifically clarified that no additional charges will be imposed during the moratorium.
There are therefore 3 options that can be considered with regard to the moratorium on hire-purchase, namely:
- Do not opt for the moratorium: borrowers / clients will continue to pay their monthly repayments and no change will occur in loan conditions such as payment amounts and loan term;
- To opt for the moratorium and pay the deferred payments in a lump sum: borrowers / customers can benefit from a deferred repayment of loans over a period of 6 months and at the end of the moratorium period, can opt for the payment of the repayment sums for said period (April to September 2020) in a lump sum, in addition to their payments for October 2020. This option will ensure that the original terms remain the same regarding the term of the loan. However, this option may not be the preferred option as the borrower / client will have to pay a large amount immediately after the moratorium period; Where
- Opt for the moratorium and the extension of the mandate: Borrowers / clients can benefit from a deferral of loan repayment from April to September 2020 and after the moratorium period, loan repayment amounts will resume. The only factor that will change is the length of the loan, with a 6 month extension. No additional interest will accrue for this option.
Therefore, it is imperative that borrowers / clients wishing to adhere or not to the moratorium refer to their specific banking institutions to know the options available to them and communicate their decision to the banking institutions.