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WorldBank / IMF / US Federal Board
3rd Annual International Seminar on
Critical Issues in Financial Stability:
Preventing and Confronting Bank Insolvency
Banking Restructuring
and Resolution:
Malaysia’s Experience
by
Mohd Razif Abdul Kadir
Assistant Governor
Central Bank of Malaysia
4-6 June 2003
1
Presentation outline
 Malaysia’s economy and banking
sector prior to Asian financial crisis
 Impact of financial crisis
 Framework for crisis containment
 Moving forward
2
Malaysian economy: pre-Asian crisis
 Enjoyed strong GDP growth & price stability for 4 decades
 Broad-based growth, averaging 8% for 8 consecutive years
until 2Q 1997
 Strong fiscal surpluses since 1993
 Low unemployment (1997: 2.6%)
 High domestic savings (1997: 39.4% of GNP)
 Low foreign indebtedness
– Short term debt: 29% of total debt
– Debt servicing ratio: 5.5% (end-1997)
3
Banking system: pre-Asian crisis
 At onset of crisis, banking sector in position of strength
as at Jun-97
RWCR
12%
Net NPL ratio
2.2%
Loan loss coverage
Profit before tax (half-year)
91.8%
RM 5,310 m*
Loan growth
~ 29%
 Policies were focused on development and reform:
– Strengthening supervisory framework and intervention powers by BNM
 BAFIA 1989 provided integrated banking supervision framework
– Broadening and deepening financial market
– Developing the bond market
 Implemented pre-emptive measures to reduce vulnerability
– Measures to slow down credit growth started in 1995
– Contained formation of asset bubble in property and stock market with
imposition of lending limits in March 1997
* RM3.8 = USD1
4
Nevertheless, there were areas of concern
Strong loan growth
in 1994-97 of 23%
p.a., with increased
lending to vulnerable
sectors
High loan
exposure of the
banking system
Under-developed
bond market
Concentration
of risk in
banking system
Fragmented finance
company industry
(39 cos.) and narrow
business focus
Finance cos.
industry
vulnerability
While property
market plateaued,
stock market
continued to rally
Risk of
correction and
outflows
5
Impact of financial crisis
Sharp drop in
currency
value
RM depreciated
by about 40%
against USD
Major
corrections
in equity
market
KLSE fell by
about 79%
Weak regional
export demand
Strains on
banking sector
Distresse
d
corporate
sector
Rising NPL (2.2%7.3%)
Capital erosion
Higher funding cost
Tight liquidity
Deteriorating
economic
conditions
Real GDP
contracted by
6.7% in ‘98
Downgrading
of sovereign
rating
Inflation
peaked
at 6.2% in
June ‘98
6
The vicious cycle of the crisis
Fall in currency value
Fall in stock market value
Extreme volatility in financial markets
•  Health of companies
•  Wealth of consumers
 Economic activities
 NPLs
 Health of banks
Inefficiencies in
intermediation
process
7
Framework for crisis containment
INSTITUTIONAL FRAMEWORK
Danaharta
•Remove NPLs
•Maximise recovery
Corporate Debt
Restructuring
Committee
Voluntary debt workout
Danamodal
Recapitalise viable
institutions
SME special
funds
Domestic banking
sector consolidation
Provide financing
at reasonable rate
Consolidate fragmented
industry
Pre-emptive & comprehensive package to ensure
intermediation process functioning
8
Linkages between Danaharta, Danamodal
& CDRC
Steering Committee - BNM
Rehabilitation
Funds
Danamodal
Bonds
New
Capital Cash
Borrowers
Bank
Sell
NPLs
New loans/
restructure
distressed loans
New Loans
Bonds/
Cash
Danaharta
Rehabilitation
Restructure
existing loans
CDRC
9
Operating principles
Danaharta
• Market-based
• Hair-cut
• Backed by
legislation
• Sharing of
excess
recoveries
(80:20)
• Mgmt of NPL
Danamodal
• First loss
principle
• Viable
institutions
CDRC
• Voluntary
• Complements
Danaharta
• Danamodal
appointees
• Facilitates debt
restructuring of
larger firms
• Management
revamped where
necessary
• Ceased
operations in
August 2002
10
Danaharta
 Acquired RM39.8 billion* or 38.5% of NPLs of the banking
system at average discount rate of 54.4%
 Successfully dealt with all of the NPLs under its purview
amounting to RM52.5 billion*
 Implemented various recovery strategies through
restructuring, settlement, foreclosure and schemes of
arrangements to maximise recovery
– Average recovery rate of 57% (50% for acquired loans, 63% for
managed loans)
 Expect to cease operations in 2005 as planned
* RM3.8 = USD1
11
Danaharta – Key success factors
 Special powers accorded under the Act to enable them to
operate quickly and efficiently
– Include powers of compulsory acquisition, to change
shareholdings and substitute existing boards, as well as powers
to repudiate contracts, transfer assets and liquidate companies
 Act also protects Danaharta against unknown claims in
relation to acquired NPLs. However, claimant continues
to have recourse to the selling BI or original lending BI
 NPLs acquisition are on willing buyer, willing seller basis
– BIs are free to sell or keep their NPLs
– However, those seeking capital injection from Danamodal must
sell their NPLs (in excess of 10%)
 Sharing of surplus recovery is on 80:20 basis (selling
institution : Danaharta)
12
Danaharta – Governance structure
 Danaharta structured to facilitate transparency with
strong corporate governance (diverse Board members –
9 members including foreigner reps, 7 from industry & 2
from Government)
 Establishment of an oversight committee to oversee,
approve and terminate appointments of special
administrators
 Not allow any one person to make decisions on loan
restructuring or sales of assets
– Helps fend off legal action and challenges
 Foreclosed property sold through an open tender process
13
Danamodal – initial budget of RM16 billion
•However, only RM7.1 billion* was injected into 10 viable
banking institutions
•Adhered to first-loss principle
•Repayment began after 1year of injection
•RM5 billion* repaid to date
•RM2.1 billion* remain in 3 banking institutions
•Targeted for closure in 2003
* RM3.8 = USD1
14
Corporate Debt Restructuring Committee
Voluntary platform for creditors and borrowers to work
out feasible solutions to debt problems amicably without
resorting to legal action or liquidation
Preserve value of viable companies
 Steering Committee provide oversight
 Eligibility criteria:
– Company must be viable
– Aggregate debts of RM100 million* or more (adjusted fr RM50m)
– More than 5 creditors (adjusted fr 3 creditors)
– Company not in any insolvency administration eg liquidation
* RM3.8 = USD1
15
CDRC – Principles and progress
 Principles of debt restructuring:
– Fair treatment to ALL stakeholders
– Haircuts borne by shareholders (greater proportion) and creditors
– Accompanied by corporate restructuring
 Sale of non-core assets, refocus business activities
– Full information disclosure and sharing of information
Status of CDRC cases as at 31 March 2003
Total debt outstanding
(RM m)
Number of
accounts
Total transferred to CDRC
67,644
87
Cases withdrawn / rejected
12,615
28
2,470
11
Cases accepted
52,559
48
Resolved
52,559
48
44,557
33
8,002
15
Transferred to Danaharta
Implemented
Pending implementation
16
Consolidation was also promoted to
further strengthen the banking sector
 To attain minimum capital size
– Increased larger capital size of domestic banking groups to RM2
billion*
– To reap the benefits of economies of scale
– To increase capacity to deal with increasing pressure from
globalisation and liberalisation
– Massive capital investments in infrastructure and technology
 To address fragmentation of the domestic banking
sector
– The number of banking institutions has reduced from 71(end-97)
to 30 banking institutions under 10 banking groups
 Tax incentives to facilitate consolidation
* RM3.8 = USD1
17
Institutional arrangements have yielded
positive result at low cost of <5% of GDP
%
14
13.3% 13.2%
RWCR
13
12.3%
12
11.8%
11%
11
10
Core capital
Net NPL ratio
6
8.3%
6.3%
7
– RWCR : 13.2% (98 : 10.1%)
– Core Cap Ratio : 11.0% (98 :7.9%)
 Asset quality improved further
9
8
 At end-April 2003,
capitalisation remained strong
7.0%
Net NPL ratio
– (6-mth basis) - 7.0% (98 :9.0%)
– (3-mth basis) - 9.8% (98 : 14.9%)
Jan May Sep Jan May Sep Jan May Sep Jan
2000
2001
2002
2003
 Closure of Corp Debt Restructuring Committee in August
2002
 Winding down operations of Danamodal and Danaharta
18
Key success factors
 Strong commitment and support by Government
 Pre-emptive and comprehensive approach
 Focused role and clear objective of institutional
arrangement
 Enabling legal infrastructure
– Pengurusan Danaharta Nasional Berhad Act 1998 (PDNBA)
 Political will – speed in passing of PDNBA
 Market principles and strong governance
 “Carrot and stick” approach
19
Moving forward – medium and long term
strategies
 Enhancing financial system stability (surveillance
system, deposit protection)
 Enhancing regulatory and supervisory framework
 Managing financial liberalisation (GATS etc)
 Achieving socio-economic objectives
 Developing a competitive banking sector
FINANCIAL SECTOR MASTERPLAN
20
Financial Sector Masterplan
 Launched in March 2001
 Five main characteristics: efficient, effective, stable,
prudential regulation and infrastructure
 Broad strategies with 119 recommendations
 6 building blocks
Islamic
Banking
& Takaful
Alternative
Modes of
Financing
Banking
Insurance
Development
Financial
Institutions
Labuan
IOFC
21
FSMP - Objectives

Create a more efficient,
effective and stable financial
system



efficient: services at lowest
cost
effective: broad range of
services
stable: minimal systemic
risks

Meet socio-economic
objectives in an effective and
efficient manner

Meet international
commitments and prepare
domestic financial institutions
for global competition

Support the overall
economic transition

Develop and
strengthen the real
sector

Meet the demands of
the consumers

Develop a core of
strong domestic
banks to be the
backbone of the
financial system
22
Recommendations will be implemented
in Three Phases
Phase 3
( after 7 years)
Phase 2
(3-4 years)
Phase 1
(3 years)
Enhance capacity
of domestic
institutions to
compete
Enhance financial
infrastructure
•Intensify
competitive
pressure in the
domestic financial
sector
Checkpoints
•Assimilate
into global
arena
•Introduce
new foreign
competition
Checkpoints
23
Thank You
24