Moratorium: Yes or No?

The Prime Minister has announced the new loan moratorium for a duration of six months and the application starts from today 7th July 2021. Many are curious whether to take this moratorium. What is the catch here? Will I benefit from this? These are some of the questions I receive on a daily basis.

Before we think on opting for the moratorium let’s digest some numbers from the previous moratorium which was given last year (2020) during the first MCO period. According to Bank Negara?Malaysia (BNM), more than 7.7 million individual borrowers or 93% of all borrowers have opted for the first moratorium worth RM38.3 billion. A total of 243,000 or 95% of SME borrowers opted for moratorium worth RM20.7 billion. These data reveal that majority borrowers had opted for moratorium last year. Some have taken the moratorium because of the need while the rest took it because it was given. In whichever category you are, informed decision will give better results. Now, let’s see who should opt and who shouldn’t opt for the upcoming moratorium:

Who should opt and why? Today’s situation has cost many of us our jobs, suffering pay cuts and business owners being thrown in a financial crisis. When faced with a crisis, the first thing you will need is liquid cash to manage your daily expenses and to pay your bills. Hence, your emergency fund must be very much accessible with ready-to-use money in it. Ideally, this fund should be in the form of a fixed deposit or money market. Hence, if you are in the midst of any crisis at the moment, moratorium or the regulatory to postpone loan payment is a good step that can work to your benefit. If your debt ratio is 30% to 50% from your monthly income, this could be very helpful for you during this unprecedented time. A short-term break from paying the monthly instalments for car or home loans gives you much-needed breathing space to deal with more immediate needs, such as putting food on the table while taking home smaller pay packets.

Maslow Theory. Maslow first introduced his concept of a?hierarchy of needs?in his 1943 journal publication "A Theory of Human Motivation". Maslow's hierarchy is most often displayed as a pyramid. The lowest levels of the pyramid are made up of the most basic needs, while the most complex needs are at the top of the pyramid. Needs at the bottom of the pyramid are basic physical requirements including the need for food, water, sleep, and shelter. Once these lower-level needs have been met, people can move on to the next level of needs, which are for safety and security. Further up the pyramid, the need for personal esteem and self-actualization feelings of accomplishment take priority.

Who should not opt and why? As per Maslow Theory, once the basic needs, safety and security are met, the other expenses are built with your aspiration. If you are not impacted in the current scenario and life is going on as usual with you having enough emergency fund, then the moratorium will not bring much benefit for you.

What is bank’s purpose? To be very blunt, bank’s top priority is to make profit. Banks are not charity organisations. Banks will never understand our problem. In the current scenario however, the loans are structured, and banks will be benefitting from that, either in the short or long term. If you go into the technical part of the calculation, consumer is at the losing end by taking the moratorium. So, if you are not impacted by this pandemic, think how you can reduce your debt faster at the lowest cost possible, because you may be affected should there be another crisis in the future. One thing COVID-19 has taught us is that you can never predict what’s going to happen tomorrow!

Although the coronavirus affects everyone, it has exposed extreme financial inequalities more profoundly than any previous crisis. Like it or not, all of us are in different financial situations during this pandemic. Some are looking for opportunities, buying good stocks and properties; some are going through financial crisis; some have lost their jobs; some have to take a pay cut while some frontliners are fighting to destroy this virus. Whatever the situation, priority should be given to putting food on the table and for others who are in need. This is the time to support each other and uphold the humanity that lies in each and every one of us.

Money a’int everything in Covid-19. Salute all the frontliner’s for their courage and effort. Stay home, Stay safe!