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Loan moratorium is a policy issued by Malaysia government to relieve finance burden of individuals and corporate in the midst of COVID-19 pandemic. Under this policy, all banks need to provide automatic 6-months moratorium on loan repayments effective from April 2020 to September 2020. This article will explain why this is going to impact financial performance of banks.

Total cost for the whole banking industries

According to my calculation from news, the total collective cost for banks for 6-month long of moratorium is about RM2.4 billions. At the end of this article, I’ll summarize the loss incurred by each of the bank.

The loan repayments are deferred by 6 months, eventually banks will still receive the money from borrowers, where is this loss coming from? This loss is called “modification loss“, some also called as “day-one modification loss“. To understand this term, you must first have the concept on “time value of money“.

Modification loss explanations

Time value of money (Basic concept)

Money always lose its value over time because of inflation. As an example, a typical McDonald set meal costs about RM15 today. The exact same set meal costed about RM10 few years ago, and eventually the price will go up to RM20 in the future some day.

Another way to think about it. For RM1000 that you own today, even if you put in the the safest investment (e.g. fixed deposit), it will grow. So the face value will grow with time, even though its buying power might not change.

To quantify time value of money, economists have come up with a formula to convert future value of money to present value or vice versa, through an interest rate. The interest rate does not equal to inflation, it also factors in opportunity cost.

It is not the intention of this article to explain in details. For readers interested to understand more on time value of money, here and here are some good reading material.

Value of loan in financial reports

So for banks, how banks calculate value of a loan offered to borrowers？It is basically conversion of future value of all future repayments into present value.

Modification loss example

I will explain through a simplified case. Let’s assume bank provided a loan with agreed 10 scheduled future repayments. Make vertical arrow represents future repayment and horizontal line represents timeline.

Top figure represents original schedule. By applying loan moratorium with each loan repayment deferred by one period, the schedule is revised to bottom figure.

So did you spot the difference between 2 figures? What loan moratorium did was defer each repayment by 1 time period. However end result is equivalent to one repayment defers by 10 time periods.

Do you think value of money at 1st time period and 11th time period is the same? No, because value of same amount of money gets smaller in future because of inflation. Also within the 10 time periods, bank loses the opportunity to use repayment that should have been received much earlier to lend to other people for more profit. This is the opportunity cost that bank is losing.

By calculating losses mentioned above using time value of money formula, that is the “modification loss” ! It is also called “day-one modification loss, because the loss is incurred at day one that moratorium is applied. This is requirement from accounting standard MFRS 9.

(See here for additional reading about MFRS).

Summary of modification loss due to loan moratorium

Hope you have now understood modification loss resulted from loan moratorium. Below I’ve summarized modification loss incurred for each bank.

• MBSB – RM 512 million
• Public Bank – RM498 million
• RHB – RM 392 million
• Maybank – RM 314 million
• CIMB – RM281 milliion
• Hong Leong – RM 142 million
• Bank Islam – RM 97.8 million
• Affin – RM80 million
• Alliance Bank – RM 64.5 million
• Ambank – RM 57.5 million

Conclusion

It is not necessary that modification loss will make banks fall into red, it definitely will impact profit of banks for 2nd quarter of 2020. The extent of impacts differ from bank to bank, depending on the loan profile of individual banks.

Hope this article is helpful to you, share if find this article useful.