‘Unpredictable, unintended consequences’ if interest waiver implemented

12-Oct-2021 Intellasia | FreeMalaysiaToday | 5:02 AM Print This Post

An economist has warned against unnecessary interference in the market by implementing a total waiver on interest accrued during the loan moratorium, as it could put unnecessary strain on an already fragile market.

The issue has come under scrutiny during the loan moratorium, with some arguing that deferring but not waiving interest will saddle borrowers with higher future costs once their repayments restart.

However, CEO of the centre for Market Education, Carmelo Ferlito said such a broad policy could cause “unpredictable, unintended consequences”.

If the rationale was to help people who had been hurt by the extended lockdowns imposed during the pandemic, “is there a better way to do so without compromising the long run financial stability of the country?” he said.

“I believe so. And this would be inviting the bank to support their clients in restructuring their debt positions. Ad hoc solutions, studied by banks together with customers, for their mutual benefit, would be an approach able to help households in trouble without compromising our national financial stability.”

He said while it is often appealing for some to depict banks as “sharks”, they play a crucial role in protecting people’s savings, and providing resources for individuals and companies to invest by providing loans and other financial instruments.

“The risk I see in the short run is indeed a reduced availability to lend, both to households and businesses. Which means fewer opportunities for families not only in terms of their investments but also in terms of fewer job opportunities because of less growth at firms level.”

“Long term, in the most extreme scenarios, you end up causing banks to fail and affecting the savings of all its depositors.”

He said as the country’s economy begins to normalise, it is important not to interfere with a banking system that is on its own recovery path.

On whether waiving interest would really help the lower income borrowers, given that their loans, and thus their accrued interest would be smaller, he said: “A waiver will not meet its targets because you are talking about a very small amount.

“So an approach where we aim to restructure the debt rather than waiving the interest, could ensure a better balance between financial stability of households and the country.”

Previously, Bank Negara Malaysia governor Nor Shamsiah Mohd Yunus said interest collected from loans represented around 80 percent of the banks’ total income, and to remove it during a moratorium would harshly affect their liquidity.

Nor Shamsiah said the effect on the banking system’s liquidity would force banks to cut back on lending to preserve their own cash buffers built up during times of economic prosperity to insulate them against economic shocks.

“Confidence in banks would be affected, which could trigger liquidity stress. Depositors may have concerns about the safety of their deposits, and this action would also jeopardise depositors’ interest,” she said.

https://www.freemalaysiatoday.com/category/nation/2021/10/11/unpredictable-unintended-consequences-if-interest-waiver-implemented/

 

Category: Malaysia

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