KUALA LUMPUR (Sept 24): The interest rate waiver proposed by the Ministry of Finance (MoF) will negatively impact banks' earnings recovery this year, said RAM Rating Services Bhd.

However, it does not expect the proposal to cause an immediate adverse rating action in respect of its portfolio of domestic banks.

Last Tuesday, the MoF proposed the interest waiver for borrowers in the bottom 50% (B50) income bracket under the current loan moratorium programme. The waiver will be for three months in the fourth quarter of 2021 (4Q2021).

“The interest exemption from October to December 2021 for B50 borrowers will erode the 4Q2021 earnings of banks although they are still anticipated to turn in a profit for the full year,” said RAM’s co-head of Financial Institution Ratings Wong Yin Ching in a statement Friday.

But while banks with greater loan exposure to the B50 income group will be more severely affected, the imposition of the proposal is unlikely to be a threat to banks’ capitalisation on the whole, Wong said.

“Troubled credits are presently obscured by forbearance measures but bad loans are envisaged to rise as relief programmes are gradually phased out. Banks need to preserve their capital to cushion against expected higher credit losses,” she added.

The three-month interest waiver for the B50 borrowers is in addition to the six-month loan repayment moratorium implemented in July this year for all individual, microenterprise and small and medium enterprise borrowers on an opt-in basis.

RAM Ratings said about 26% of the eight anchor banking groups’ domestic loans were under relief, based on data shared by the banking groups in August. The majority of individual borrowers had chosen the deferment of repayments as opposed to reduced instalments, it added.

At this juncture, the impact of the interest waiver is difficult to assess, it further said, as banks await more clarity on the latest relief measure in terms of scope and eligibility. The definition of B50 is also still unclear, it noted.

Using borrowers earning less than RM5,000 per month as a rough proxy, these are estimated to make up around 18% of total loans in the banking sector, RAM Ratings said.

“Assuming all B50 borrowers apply for relief, the loss in interest income for the commercial banking sector could amount to an estimated RM3.5 billion in 2021. This earnings hit has not taken into consideration the modification charges that banks will also have to incur arising from the Pemulih moratorium,” it said, adding it will monitor the situation and reassess any impact as more information becomes available.