ON June 9, Scomi Group Bhd announced it had entered into an RM8 million settlement agreement with Maybank for sums owed. That’s a 93% haircut for the total of RM113.96 million it owed the bank.

Separately, it was reported that Sapura Energy had proposed and the banks had agreed to a haircut of 75% for the group’s debt of RM10 billion.

Why have the banks accepted such huge losses? Because the borrowers are insolvent and can no longer pay its debts?

These borrowers appear to have it easy.

First, take out a loan. Then, make a mess of the money. Next, declare insolvency. Finally, tell the bank to give them a haircut on the sum owed. 

And banks will agree because it is better to get something instead of nothing as an insolvent business cannot repay its debts.

Distressed selling of the borrowers’ assets are less lucrative than haircuts.

For the individual, owning a house or a car is a dream because of the availability of loans. 

What happens to the borrower’s loan commitments if they lose their jobs or become trapped in debt?

This was what happened in 2020 when the Covid pandemic hit the country and everything came to a standstill.

Businesses were closed, workers retrenched or sacked.  

Default was imminent. A default occurs when the individual borrower repeatedly fails to make payments to the lender.

Do banks understand that there could be genuine reasons the borrower is unable to make timely payments, such as loss of job, or a disabling accident? 

There were pleads for the banks to grant such borrowers a moratorium on their monthly loan repayments as well as a waiver of the penalties for late payment.

A moratorium was granted at the behest of the government but no waiver was given for the penalty interest.

Even in normal times banks are not well equipped to help customers. During the lockdowns, the public was hoping the banks could play a significant role in easing financial distress.

Unfortunately, it didn’t happen.

The central bank governor in August 2021 said interest collected from loans represented around 80% of the banks’ income, and to remove it would severely affect the banks’ liquidity have significant long-term consequences.

The governor also said if the interest was waived, the banks’ credit ratings could also be downgraded to reflect weaker future earnings, and this will make it more costly for them to raise capital. Confidence in banks would be affected that could trigger liquidity stress and depositors could have concerns about the safety of their deposits. A waiver would also adversely affect the banks’ abilities to pay dividends.

Maybe the BNM governor would care to explain why then the banks have willing accepted the haircuts on the debts of two entities listed on Bursa Malaysia as well as the billions of ringgit in losses on their investments in Genting Hong Kong and Hin Leong Trading in Singapore.

The waiver for the penalty interest sought by the individual borrowers were unlikely to exceed RM10.5 billion.

But just a few corporate failures and the banks have recorded a loss in excess of the amount.

In their annual reports, the banks emphasise on their ethical values, moral principles, and commitment to society as part of their governance structure and corporate behaviour. Are their declarations genuine?

It would appear that banks in Malaysia discriminate between individual and corporate borrowers.

Ultimately, who bears the cost of haircuts and defaults? The banks? The shareholders? Nope.

It is the economy and the public who bear the ultimate costs if the losses suffered by the banks result in their capital adequacy ratio dropping below the regulatory requirements and the government has to step in to rescue the institutions. 

Public trust in the banks in Malaysia was already in tatters prior to the MCO in 2020. 

How low must the trust drop before the government decides to step in and restore public confidence in the banks?

Ethical banking involves consciousness of how banking practices affect society and the environment. Even though they strive to generate earnings, it should be done without sacrificing principles or causing harm. – June 15, 2022.

* FLK reads The Malaysian Insight.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.