By issuing a backdated approval for banks to sell off their non-perfoming loans to debt collection agencies, including foreign-owned ones, the finance minister has betrayed the trust of the people
Non-performing loans (NPLs) are bad for the banks (it affects their bottom line – profits), bad for Bank Negara Malaysia (it means that BNM is not effectively “managing” the way the banks are doing their business) and bad for the government (because the debt ratio will be high).
When NPLs are in the billions, it means that the people are unable to pay their debts – which reflects badly on the government to financially manage the problem of bad debts.
It is in the interest of the banks to lower their debt ratio by minimising their NPLs. They can minimise their NPLs in a number of ways. The most obvious is to ensure that they give loans to people who can afford to repay – be prudent in their assessment of potential clients. We know that loans given by banks are done so for a number of reasons.
When a loan becomes a NPL, the sale of these NPLs are allowed as a normal banking practice in most countries but in Malaysia, the Banking and Financial Institution Act of 1989 (Bafia) does not allow this to be done.
Why would anybody want to buy a NPL? Allow me to explain.
You take loan from a bank normally against an asset used to guarantee the loan. A bank would give a loan not for the full value of the asset used to guarantee the loan but for a percentage of the full value of the asset.
An asset, say, real estate worth RM100,000, would secure a loan of RM60,000. After securing the loan of RM60,000 the debtor starts paying off the loan and normally the default occurs many months after the loan was given and after some payments were made towards the loan.
By the time it becomes an NPL, the asset used to guarantee would be valued more than the actual loan outstanding. If the loan stays with the banks, then the defaulter enters into negotiations with the bank to pay off the loan over a period of time.
When the bank sells the NPL to a debt collection agency, what drives the debt collection agency is profit. The debtor would be under pressure to settle the outstanding loan to the advantage of and on terms and conditions that would favour the debt collection agency. The rights of the debtor would not be fully protected as compared to if the debt stays with the banks.
As I have said earlier, Bafia does not allow the banks to sell their NPL. But the banks have been doing this – especially after 2007 when the advent of the GFC hit Malaysia hard.
Najib’s backdated approval
The banks continue to do this illegal selling of their NPLs until 2009 when Prime Minister Najib Tun Razak issued a letter giving a “blanket approval” for banks to sell their NPLs to debt collection agencies – and backdated the approval to 2007 – to make legal what the banks have been doing illegally.