The Bank Moratorium 2020: Why You Must Have It (with Illustration)

Updated: Apr 5, 2020

You’ve read it in the news, and social media has been abuzz with it.


You have been given a 6-month bank moratorium beginning 1st April 2020.

If you had any doubt, it was swept away when you received a text message or email from your bank confirming that they will not be taking any payments from you between 1st April to 31st September.


You’re delighted. 


Global uncertainty in the face of Covid-19 has had you on the edge. You’re restricted at home. Your office is closed. Many people have lost their jobs or are taking pay cuts. 


Businesses are drowning.


Not having to pay your loans for 6 months is certainly a relief. Hell, it’s the best news you’ve heard all year.


But wait a minute…


Is there a catch? It seems too good to be true. 


What’s this about accrued interest during the moratorium? There’s talk that you may have to pay compounding interest.


Commentaries on social media are divided with some saying the moratorium is good for you and others saying it is the most expensive holiday you’ll be paying for.


You’re a little confused now. Is this moratorium good for you or not?


To make sense of all this, you must look at the bank moratorium with mathematical logic. As Sherlock Holmes would say,


“Crime (or in our case, opinion) is common. Logic is rare. Therefore it is upon the logic rather than upon the crime (or opinion) that you should dwell”


So, bring out your looking glasses. Let’s take a closer look at the logic behind this moratorium.

What’s a Moratorium in Banking?


We should start with clarity. Let’s look at the word “moratorium” first.


Bank Moratorium Definition


According to the Merrian-Webster dictionary, a moratorium is “a legally authorized period of delay in the performance of a legal obligation or the payment of a debt.”

Simply put, it is the suspension of an activity.


Bank moratoriums are more common than you may think. 


Education loans for example, usually come with a moratorium. The student who takes the loan is not required to make any payments until she graduates and starts working. 


Thus, the moratorium period of an education loan depends on the length of study.


Is Interest Charged During a Moratorium?


Interest is often accrued during the moratorium.


In the example of the education loan, interest would be calculated on the amount disbursed and added to the principal loan amount.


When the student finally starts working, her interest would be calculated on the total amount (principal + accrued interest).


In this instance, interest is paid upon interest accrued during the moratorium. This compounding effect causes the student to pay more in interest.


So a moratorium is not a cost-free holiday. There is an interest cost. 


But is there any benefit to you, in spite of this interest cost? Let’s go deeper down the rabbit hole.


The Bank Moratorium in Malaysia: Why?

Let’s be clear. The banks were not eager to give you a moratorium. Suspending payments for 6-months would put a serious dent in their cash flow.


Bank Negara Malaysia (BNM) imposed this on all banks. For good reason.


The world is facing an economic crisis with no precedence. The global shutdown caused by Covid-19 is sending shockwaves through the economy.


Almost all businesses in Malaysia have shut down. The retail market is suffocating. The tourism industry is crippled. People are going to lose their jobs or incomes.


In a country where a third of its people live paycheck to paycheck, this is alarming. A mass default in loans can trigger the collapse of our financial system.


BNM made a smart pre-emptive move.


The 6-month moratorium was implemented with surgical skill. 


Before announcing the moratorium, BNM lowered the statutory reserve requirement from 3% to 2%. Banks now needed to keep less reserves and could lend out more money. RM30 billion more to be exact. 


Not only can banks profit from this but liquidity in the market has increased.


Prior to this, the OPR was also reduced. Twice.


A reduction in the OPR results in lower interest rates.


The resulting effect is more money in the market, and the cost of borrowing is cheaper.


Here's the thing about the economy. It’s about what people do. It’s the everyday transactions that all of us make. All these transactions are interconnected.


Therefore, if demand for goods and services drop significantly, a recession is triggered.


How do you keep demand from free-falling? Give people more disposable income. Enter the moratorium.


This 6-month moratorium is a lifeline to the economy and a stroke of genius.


Ok, but what is this moratorium going to cost you?


Moratorium Interest Calculation


Let’s look at an example.


Let’s say you have a mortgage of RM500,000 with the 1st repayment commencing on 1st April 2020 (the start of the moratorium). The loan is payable over a period of 30 years at an interest rate of 4%.


Your monthly repayment is RM2,387.


With the 6-month moratorium your payment commencement is deferred to 1st October 2020.


Interest accrues during the moratorium.


Therefore, at the end of the moratorium, you will owe RM10,000 in interest.


Now, if interest was not compounded during the payment period, your new monthly repayment amount would be RM2,415. An increase of RM28.


But if interest payments were compounded, your monthly payment would be RM2,435. A further increase of RM20.