Loan Re-structuring and measures by the Central Bank of Malaysia

Introduction

The COVID-19 pandemic and the imposing of lockdowns have sent economic shockwaves across the globe. Therefore, it is important that distressed businesses position themselves to be resilient. This article attempts to explore possible solutions for corporations and businesses facing financial challenges in light of the pandemic and the various support schemes available.

Section A: Approaching the Banks

a) Debt Restructuring & Rescheduling

Pressures of financial distress due to loan commitments may be relieved by way of debt restructuring or debt rescheduling.

Debt restructuring involves extensive revisions of the loan facility’s terms and conditions whereby the existing facility is restructured by for example, capitalising the arrears in interest/profit charges and other outstanding or by including a debt to equity swap. The existing loan documentation will need to be replaced by a fresh set of loan documentation.

On the other hand, debt rescheduling refers to the adjustment of the debt repayment terms without altering the principal terms and conditions of the loan agreement significantly. A common form of debt rescheduling would be to extend the deadline for the full repayment of the debt i.e. by lowering the amount to be paid for each instalment payment and increasing the number of instalments. Usually changes to the repayment terms are reflected in a supplemental loan/facility agreement.

Both exercises facilitate much-needed time and breathing space to normalize cash flow and help to improve businesses’ financial standing whilst avoiding unnecessary insolvencies.

Special consideration must be given if the debt restructuring is effected in the context of an Islamic financing agreement to ensure compliance with Shariah rules and principles. This may include the individual bank’s administrative policies on the performance of a fresh aqad (contract) pursuant to the revision of the relevant selling price and other charges¹.

Consent from the guarantor or any third-party security provider on the variations of terms and conditions imposed by the financial institutions should be obtained pursuant to Section 86 of the Contracts Act 1950².

In addition to the above, the Malaysia Economic Stimulus Package 2020 announced by the government on 27 February 2020³ provides that a 100% stamp duty exemption will be given to loan agreements arising from restructuring and rescheduling of business loans for the period commencing from 1 March 2020 to 31 December 2020 on condition that the ad valorem stamp duty on the original copy of the principal loan documentation has been paid.

Pending the issuance of an exemption order by the Ministry of Finance to that effect (which will provide more details regarding this particular stimulus package), stamp duty would be charged at a nominal rate of RM10 on the loan agreements entered into for the purpose of a debt restructuring or rescheduling provided that ad valorem stamp duty has been duly paid on the original copy of the principal loan documentation⁴. In the event that the debt restructuring or rescheduling involves the granting of new loan facilities/monies, then the relevant loan documentation will be subject to ad valorem stamp duty at the rate of 0.5% of the additional loan amount.

b) Debt Consolidation

In the case of multiple loan repayment obligations, debt consolidation may also be considered. Here, a single loan is taken (at more favourable terms such as lower interest rates) to repay the various debts of the debtor. Therefore multiple debts are combined into a single larger debt.

Section B: Reliefs Introduced by the Government of Malaysia

a) Moratorium

The Central Bank of Malaysia or Bank Negara Malaysia (“BNM”) has announced that banking institutions are to offer a deferment of all loan/financing repayments for a period of 6 months with effect from 1 April 2020⁵. The deferment package applies automatically to all individuals and Small Medium Enterprises (SMEs) with Malaysian ringgit denominated loan facilities (excluding credit card debt) that are not in arrears for more than 90 days as at 1 April 2020. Similarly, corporations may request for a deferment of their Malaysian ringgit denominated loan/financing repayment obligations which are not in arrears for more than 90 days as at 1 April 2020 from their respective financial institutions. Approvals will be subject to each financial institution’s internal credit policies and assessment.

If a longer moratorium period is required, the individual/SME/corporation are at liberty to approach their bank to discuss or submit a request accordingly.

During the deferment period, interest for conventional loan will continue to be charged on the outstanding balance comprising of both principal and interest portion. For Islamic financing, profit will continue to accrue on the outstanding principal amount. However, such profit will not be compounded in line with Shariah principles. The financial institutions are also not allowed to impose late penalty charges on the deferred amount⁶.

However, any SME wishing to opt out from the deferment package should continue to make timely and full payment of loan/financing in accordance with their existing terms.

b) Other Government Incentives and BNM Measures

Further assistance is provided by the Malaysian Government in the form of the PRIHATIN Economic Stimulus Package whereas BNM has made available several financing facilities.

1. BNM Measures

   BNM has allocated or enhanced its financing facilities under its Fund for SMEs⁷ as follows:

   1. Special Relief Facility (“SRF”) 
   2. All Economic Sectors (“AES”) Facility
   3. Automation and Digitalisation Facility (“ADF”)
   4. Agrofood Facility (“AF”)
   5. Micro Enterprises Facility (“MEF”)

   Under the Credit Guarantee Corporation (CGC)’s BizMula-i and BizWanita-i schemes, SMEs which have been in operation for less than 4 years are eligible for financing of up to RM300,000.

   Interested SMEs are advised to liaise with the participating financial institutions to avail themselves of the facilities under the Fund for SMEs.

2. Wage Subsidy Programme

   The Wage Subsidy Programme was announced as part of the PRIHATIN Economic Stimulus Package to assure that two-thirds of the SME workforce will remain employed by assisting business to reduce overhead expenses⁸:

   Size of the Enterprise	75 employees or fewer	76 – 200 employees	201 employees and above
   Subsidy amount	RM1,200	RM800	RM600
   Applicable employees	Employees with monthly wages of RM 4,000 and below. Employees must be registered with Social Security Organization (“SOCSO”).
   Employer criteria	Employer must be registered with the Companies Commission of Malaysia or the applicable authorities before 1 January 2020. Employer must be registered with SOCSO or Employment Insurance System (“EIS”) before 1 April 2020. Employer must have commenced operations before 1 January 2020.
   Requirement to show loss of revenue	No conditions specified	A decrease in revenue of at least 50% compared to January 2020 or the following months.
   Additional requirements:	Employers must retain their employees for at least six months. Employers are not allowed to deduct salaries of their existing staff.

3. Special Grant for Micro-SMEs

   Qualified micro-SMEs are entitled to a one-off financial assistance amounting to RM3,000⁹.

4. Tax measures

   The Inland Revenue Board of Malaysia has announced, inter alia, the following¹⁰:

   1. No penalty will be imposed on late payment of taxes provided the payment is made on or before 31 May 2020.
   2. SMEs are automatically allowed to defer CP204 income tax payment for 3 months beginning 1 April 2020 until 30 June 2020.
   3. Businesses in the tourism sector are allowed to defer CP204 income tax payment for 6 months beginning 1 April 2020 until 30 September 2020.
   4. Landlords (corporate, individual, cooperative or other business and non-business entities) offering at least 30% reduction of rentals to SMEs tenants from April 2020 to June 2020 are allowed to claim a special deduction equivalent to the rental reduction amount¹¹.

Conclusion

The measures introduced by the government, whilst targeted at a specific group and temporary, offer much needed support for businesses facing unprecedented times. Corporations and businesses should also take proactive steps by approaching their banks to discuss solutions moving forward to minimise financial impact and where appropriate, consider alternative strategies to safeguard business operations and value.

Zain & Co. acknowledges Associates Tan Jo Rene and Lee Jie Jiun for their contributions to this article. For further information or any related inquiries, please contact our Partners, Zainal Azlan Abdul Kadir and Zain Azrin Zain Azahari.

1. BNM: Credit Risk Policy, issued on 27 September 2019↩
2. Maplelee Property Sdn Bhd v Tan Lei Fon [2005] 3 MLJ 305↩
3. Economic Stimulus Package 2020 “Bolstering Confidence, Stimulating, Protecting Jobs” dated 27 February 2020↩
4. Item 22(2) of the First Schedule of the Stamp Act 1949↩
5. BNM Press releases: Measures to Assist Individuals, SMEs and Corporate Affected by Covid-19 (25.3.2020)↩
6. FAQs on Deferment Package and Conversion Package (Revised on 21 April 2020)↩
7. Features of BNM Financing Facilities to Assist Malaysian SMEs↩
8. FAQ Prihatin Tambahan Program Subsidi Upah Sistem Insurans Pekerjaan (SIP), Perkeso, Bil.4/2020 (18 April 2020)↩
9. FAQ Pakej Rangsangan Ekonomi Prihatin Rakyat (Prihatin PKS) (30 April 2020)↩
10. LHDN’s FAQs on Tax Matters During the Movement Control Order and the Conditional Movement Control Order Period (Updated on 10 May 2020)↩
11. LHDN’s FAQs on Economic Stimulus Package 3.0 (Rental Reduction for Business Premise) (Updated 28 April 2020)↩