Loan Moratorium – The Legal Perspectives
1. BACKGROUND – MOVEMENT CONTROL ORDER (MCO) AND ITS EFFECTS ON LOANS
Thou canst not fly high with borrowed Wings.
Proverb – Thomas Fuller, Gnomologia 1732
This ancient proverb epitomizes the dilemma of leveraging on credit to expand one’s business or for personal use. It is sine qua non however that any debt need to be repaid. Furthermore, it is an accepted economic reality that the provision of credit and the offering of loans and funding is an essential component of any efficient financial system.
The movement control order (MCO) was first imposed nationwide on 18 March 2020. A week later, Bank Negara Malaysia (BNM) announced a number of regulatory and supervisory measures in support of efforts by banking institutions to assist individuals, small and medium-sized enterprises (SMEs) and corporations to manage the impact of the Covid-19 outbreak including a ‘blanket’ moratorium on all loan and financing repayments for a period of 6 months with effect from 1 April 2020. Somehow, the spread of COVID-19 persisted and the Government imposed another total lockdown nationwide from 1 June 2021. So far, there has been no news for another ‘blanket’ loan moratorium. There have been however, views amplifying the need for another ‘blanket’ loan moratorium similar to the one introduced during the first MCO.
BNM have advocated that a ‘blanket’ automatic loan moratorium was not necessarily the best solution. More recently, the Minister of Finance indicated his Ministry would not be deploying more resources than necessary in curbing the problem, and rationalized that it will be unwise to utilize “a sledgehammer to crack a nut”. It is pertinent to note that last year’s ‘blanket’ loan moratorium had benefited everyone including the T20, the rich, the elite, big corporates and companies when arguably they did not even need it in the first place. Interestingly, on the other hand, there are voices coming from various quarters to impose another ‘blanket’ loan moratorium a la MCO 1.0 and some have even predicated the potential legal provisions for the enablement of this initiative.
2. ROLE AND OBJECTIVES OF BNM – THE CENTRAL BANK
A central bank is an institution which governs and regulates the banking system in the country. Central banks are known by different names in different countries – some call it as Central Bank, Reserve Bank, National Bank or Monetary Authority. In Malaysia, it is the BNM.
BNM and the banking industry consisting of the commercial banks, investment banks and Islamic banks make up the components of the Malaysian banking system, and BNM is emplaced at the core of the regulatory framework. BNM derives this status and position from the Central Bank of Malaysia Act 2009 (CBA). Under CBA the roles and functions of BNM have been substantially refined and are specifically defined in Section 5 Pt II. Section 5(1) states that ‘The principal objects of the Bank shall be to promote monetary stability and financial stability conducive to the sustainable growth of the Malaysian economy’.
The objectives of BNM must also be read with the provisions of the primary functions of BNM which is enumerated in Section 5(2) that includes the following:-
- To formulate and conduct monetary policy in Malaysia;
- To regulate and supervise financial institutions which are subject to the laws enforced by the Bank;
- To promote a sound, progressive and inclusive financial system; and
- To act as a financial adviser, banker and financial agent of the Government.
Section 5(4) of CBA also provides that BNM in giving effect to its objectives and carrying out its functions under the Act shall have regard to the national interest.
The key points to note are that BNM in implementing its role and executing its functions under CBA, is bound to inter-alia incorporate strategies and policies that do not impede the sustainable growth of the Malaysian economy, having regard to the national interest. As such, any decisions that BNM makes with regard to any ‘blanket’ loan moratorium must be tempered with the criteria of ensuring it is beneficial for the long term prospects of the country’s economy. It is a responsibility that is inter-twined with economic and realistic facets of accountability for future generations.
3. POWERS OF BNM RE LOAN MORATORIUM
The law therein requires BNM to exercise its powers in a way which it considers most appropriate for the purpose of meeting its regulatory objectives. More importantly, the issue is not only about having the necessary powers, it is also about exercising it appropriately, proportionately and prudently, weighing national interest as a whole.
This was amply demonstrated by BNM in the first moratorium granted by banking institutions on all loan/financing repayments/ payments, principal and interest (except credit card balances) by individual and SME borrowers/ customers for a period of 6 months from 1 April 2020 to 30 September 2020, wherein specific prudential flexibilities were granted by BNM to the banking institutions in accordance with its available powers under the Financial Services Act 2013 (FSA) and Islamic Financial Services Act 2013 (IFSA) to support the moratorium by the banking institutions. These prudential flexibilities were not without cost to all involved.
Additionally, the Minister of Finance highlighted the fact that approximately 85% of borrowers resumed repayments upon expiry of the loan moratorium in September 2020. It should be noted however that even though the banks were able to absorb the losses attributed to the ‘blanket’ loan moratorium under the first MCO, the ever-evolving uncertainty of the COVID-19 pandemic may result in possible losses to their shareholders comprising the general populace and public institutions in the long term. Consequently, what are the legal provisions that BNM can leverage upon in the event of resistance from the banking domain if another ‘blanket’ loan moratorium is introduced?
i) Moral Suasion
Moral suasion refers to a traditional central bank technique of informally inducing a positive response from the banking system in its policy initiatives. The philosophy underlying moral suasion rests on the premise that the implementation of policies could be made more effective if the banks on their own accord take the necessary action to fulfil the role required of them. In the Malaysian context, experience has shown that moral suasion is most effective when it is supported by specific policy measures involving traditional central banking instruments. It is often mistaken as a legal action – however it is just a persuasive move whereby general interaction is carried out.
ii) Central Bank of Malaysia Act 2009 (CBA)
Central though BNM’s role in the regulatory system may be, it is not the sole regulatory authority. Its powers are limited in certain important respects. On top of BNM there is another regulatory authority i.e the Minister of Finance. This authority is powerful in the sense that the Minister is vested with certain important powers which BNM does not have. In having the Minister of Finance as well as the Financial Stability Executive Committee as another authority side by side with the BNM, it is intended that that the possibility of any excesses may be avoided or minimized, and therefore CBA has readily incorporated a built-in safeguard against possible excesses that may befall the banking sector as a result of having only a single and all-powerful regulatory authority. There is therefore an omnipresent check and balance governance process embedded within the Act.
Section 72 provides a mechanism to resolve differences of opinion between BNM and the Minister of Finance with regard to “policies relating to BNM’s principal objects”. Section 72 would not be applicable unless the difference of opinion relates to BNM’s principal objects as stated in Section 5 of CBA.
The fundamental underpinning of Section 72 is predicated on the fact that there is no consensus between the Minister of Finance and BNM on a specific issue relating to BNM’s principal objectives. There is no evident indication that there is any difference of opinion between the Minister of Finance and BNM pertaining to the issue of a ‘blanket’ loan moratorium. As such, Section 72 will not be applicable in the current situation. Furthermore, it should be noted that Section 72 applies between the Minister of Finance and BNM and not between the Minister of Finance and the banks.
iii) Financial Services Act 2013 (FSA)
Section 6 of FSA states that the principal regulatory objective of the Act is to promote financial stability and in pursuing this objective BNM shall inter-alia foster the safety and soundness of the financial institutions and to strive and protect the rights and interests of consumers of financial services and products. Section 7 further states that BNM shall exercise the powers and perform the functions under FSA in a way which it considers most appropriate for the purpose of meeting the regulatory objectives of the Act.
If Sections 6 and 7 of FSA are used to implement a ‘blanket’ moratorium, it appears the more BNM will need to ensure the safety and soundness of financial institutions as its first consideration for the following reasons:
- The long title to the Act provides that the purpose of FSA is “to provide for the regulation and supervision of financial institutions, payment systems and other relevant entities… to promote financial stability and for related, consequential or incidental matters”. This purpose necessarily guides the interpretation and application of the whole FSA.
- Section 6 provides that the principal regulatory objective of the FSA is to promote financial stability.
- Based on this, the actions to be taken by BNM under Section 6 should serve and are bound by this regulatory objective. Therefore in fostering the safety and soundness of financial institutions and fair and responsible and professional business conduct under Section 6(a)(i) and (iv) as well as in striving to protect the rights and interests of consumers of financial services and products, paramount considerations must be that the actions taken promote, and thus do not undermine financial stability. The powers of BNM to compel a ‘blanket’ loan moratorium under Sections 6 and 7 of FSA is arguable in that BNM’s duty in carrying out its regulatory objective is financial stability of the country. Use of these regulatory powers may further compel BNM to prioritize the safety and soundness of financial institutions in the interest of financial stability. The general rule is that despite the conferment of wide powers under Sections 6 and 7 of FSA, the exercise of those powers must be reasonable and appropriate. If the underlying economic arguments are sound enough and can be demonstrated, no court will interfere with the decision of BNM one way or the other. The test will be whether the Minister of Finance or BNM’s decision is so unreasonable that no reasonable authority would come to that decision.
- Emergency (Essential Powers) Ordinance 2021
It has been argued that the government may invoke its powers under the Emergency (Essential Powers) Ordinance 2021 (Emergency Ordinance) to impose a ‘blanket’ loan moratorium immediately. It should be emphasized however, that although the Emergency Ordinance does give greater powers to the government, it is improper use of the Emergency Ordinance to impose a loan moratorium for at least 3 reasons.
Firstly, the Emergency Ordinance is about empowering the government to take over temporary possession of properties and demand for use of resources. There is nothing provided here about suspending loan repayment obligations between borrowers and the banks. Secondly, this Emergency Ordinance is primarily targeted on private healthcare facilities in connection with testing and treatment of COVID-19 patients or vaccination programme, so employing this Emergency Ordinance for other purpose goes beyond its original intention as declared by the Government.
Lastly, and more importantly, the usage of this Emergency Ordinance will involve payment of compensation by the government, which will add to the already heavy burden that the government will need to shoulder. Provisions of Sections 4 and 5 of the Emergency Ordinance override all provisions in the Federal Constitution – of particular relevance is the overriding of the requirement for “adequate compensation” to be paid in accordance with Article 13(2) for compulsory acquisition or use of property. Under Section 5 of the Emergency Ordinance, compensation is whatever is assessed by the authorized person, which shall be final and conclusive and cannot be challenged or called in question in any court on any ground.
It goes without saying that if the existing powers proved insufficient, the government has the option to amend the Emergency Ordinance to include specific additional powers to implement a ‘blanket’ loan moratorium.
4. ‘BLANKET’ vs TARGETED LOAN MORATORIUM
The raison d’etre of any loan moratorium is to assist segments of the society that are adversely affected by the implications of the MCO. It is undeniable that there are sectors of the population and business community that need a loan moratorium to enable them to survive especially with respect to their cashflow. Be that as it may, knee-jerk reaction in policy-making is best avoided. During the first ‘blanket’ loan moratorium (April-September 2020), the net was cast wider than it should. Whilst it helped support the survival and recovery of SMEs and safeguarded the livelihood of individuals adversely affected by the MCO, it also ‘enriched’ others by increasing their spendable income by such amount, which should have been used to settle loan obligations when they could afford it.
For this reason, we see that the government through the Ministry of Finance and BNM had implemented a number of targeted initiatives. The Ministry of Finance had announced a RM40 billion Pemerkasa Plus aid package for affected individuals and SME’s. Furthermore, BNM has established a number of funds to help SMEs. These are the RM6 billion Targeted Relief & Recovery Facility, RM1 billion High-Tech Facility-National Investment Aspirations, RM1 billion SME Automation and Digitalisation Facility, RM410 million Micro Enterprises Facility, All Economic Sectors Facility, Agrofood Facility, Disaster Relief Fund 2021 and PENJANA Tourism Fund.
On top of BNM’s targeted funds, BNM and the banking industry have also set up Loan Repayment Assistance (LRA) for individuals and businesses. Under LRA, eligible individuals may get either a 3-month loan moratorium or 50% reduction of loan instalment for 6 months (for those who lost employment and B40 recipients of Bantuan Sara Hidup or Bantuan Prihatin Rakyat), or proportionate reduction of loan instalment (for those who suffer reduction of income). Eligible SMEs may get a 3-month loan moratorium or 50% reduction of loan instalment for 6 months. This is on top of other customized assistance to suit the financial needs and circumstances of individuals and businesses that remain available from banks. According to BNM, 1.5 million borrowers have benefited from LRA since October 2020.
The issue therefore is “substance” over “form” – through a targeted loan moratorium approach, a substantial portion of those affected by the MCO is being assisted and offered aid. A ‘blanket’ loan moratorium looks good in its “form” but in reality it has inadvertently helped those that may not require assistance, at the expense of the banks.
5. CONCLUSION – THE WAY FORWARD
There are plethora of legal provisions that may enable the government and BNM to implement a ‘blanket’ loan moratorium, in spite of any misgivings from the banking industry. The issue is not whether the government and BNM has the legal authority to do so – what is more important is whether BNM when exercising its powers should take into cognizance the fact its primary role is to ensure financial stability and to act in the “national interest”. This is an all encompassing notion and quite subjective. What we must remember is that previously, past governments, working with BNM, have guided Malaysia through various economic and global financial crisis. Further, the government and BNM are privy to economic information and data that will enable them to articulate fair and sensible policies for the country. The government and BNM should therefore be given space to implement a targeted loan moratorium as opposed to a blanket one.
Wielder of powers need to be wary when exercising such powers, lest there will be abuse. More than 40 years ago, Sultan Azlan Shah in his seminal Federal Court judgement reminded us “every legal power must have legal limits, otherwise there is dictatorship”. So, when the present targeted initiatives from BNM are proven to be effective and have benefited a very large number of beneficiaries, it would be an overkill to impose an overlapping initiative a la blanket automatic loan moratorium. Pressuring the government to use its power to influence BNM’s policy in this regard is also unwise. In a more recent case of Melawangi Sdn Bhd v. Tiow Weng Theong, the Federal Court said “discretion must, however, be exercised judiciously and sparingly, and only in very limited circumstances in order to achieve the ends of justice. It has to be performed with care after giving serious considerations to the interests of all parties concerned”. The Minister of Finance was on the right track when he considered not only the borrowers’ needs, but he balanced that against the banks’ interests, the banks’ shareholders’ interests, and the national interest affecting investors’ confidence before deciding not to use his ‘sledgehammer’.
Invoking the emergency powers to promulgate laws on a ‘blanket’ loan moratorium outside of the Parliament, although technically feasible, runs counter to our democratic system, especially when the public have accepted and adjusted to the new norms. So, additional emergency measures may be superfluous.
The main criterion is that there is relief for those affected by the MCO – if this can be attained through a targeted loan moratorium approach, then this should continue and suffice. Logically, this policy should be reviewed periodically to ensure its effectiveness and the government and BNM should be flexible enough to review the policy as needed.
The common objective to assist those adversely affected by the pandemic should be a dynamic commitment by everyone and not something pursued en passant for purposes of verisimilitude only.
The author, Datuk Seri Dr Nik Norzrul Thani is Chairman and Senior Partner of Zaid Ibrahim & Co. (a member of ZICO Law) and is the author of “Legal Aspects of the Malaysian Financial System” as well as co-author of “The Law and Practice of Islamic Banking and Finance”. He was formerly a Visiting Fulbright Scholar at Harvard Law School and Chevening Fellow at the Oxford Centre for Islamic Studies.
This article was published in The Edge Malaysia on 21 June 2021.