1. Banking Restructuring and Resolution: Malaysia’s Experience
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

2. Presentation outline
Malaysia’s economy and banking sector prior to Asian financial crisis
Impact of financial crisis
Framework for crisis containment
Moving forward

3. 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)

4. Banking system: pre-Asian crisis
At onset of crisis, banking sector in position of strength
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
as at Jun-97
RWCR
12%
Net NPL ratio
2.2%
Loan loss coverage
91.8%
Profit before tax (half-year)
RM 5,310 m*
Loan growth
~ 29%
* RM3.8 = USD1

5. Nevertheless, there were areas of concern
Strong loan growth in 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

6. Impact of financial crisis
Sharp drop in currency value
RM depreciated by about 40% against USD
Deteriorating economic conditions
Real GDP contracted by 6.7% in ‘98
Major corrections in equity market
KLSE fell by about 79%
Weak regional export demand
Downgrading of sovereign rating
Strains on
banking sector
Rising NPL (2.2%7.3%)
Capital erosion
Higher funding cost
Tight liquidity
Distressed corporate sector
Inflation peaked
at 6.2% in June ‘98

7. 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
 NPLs
 Health of banks
 Economic activities
Inefficiencies in
intermediation process

8. Framework for crisis containment
INSTITUTIONAL FRAMEWORK
Pre-emptive & comprehensive package to ensure intermediation process functioning
Danaharta
Remove NPLs
Maximise recovery
Danamodal
Recapitalise viable institutions
Corporate Debt Restructuring Committee
Voluntary debt workout
SME special funds
Provide financing at reasonable rate
Domestic banking sector consolidation
Consolidate fragmented industry

9. Linkages between Danaharta, Danamodal & CDRC
Steering Committee - BNM
Rehabilitation
Funds
Danamodal
New loans/ restructure distressed loans
Bonds
New Capital
Cash
Borrowers
Bank
New Loans
Restructure existing loans
Sell NPLs
Bonds/ Cash
CDRC
Danaharta
Rehabilitation

10. Operating principles Danaharta Danamodal CDRC Market-based Hair-cut
Backed by legislation
Sharing of excess recoveries (80:20)
Mgmt of NPL
First loss principle
Viable institutions
Danamodal
appointees
Management revamped where necessary
Voluntary
Complements Danaharta
Facilitates debt restructuring of larger firms
Ceased operations in August 2002
Danaharta
Danamodal
CDRC

11. 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

12. 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)

13. 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

14. 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

15. 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

16. 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
Transferred to Danaharta
2,470 11
Cases accepted
52,559 48
Resolved
Implemented
44,557 33
Pending implementation
8,002 15

17. 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

18. Institutional arrangements have yielded positive result at low cost of <5% of GDP
At end-April 2003, capitalisation remained strong
RWCR : 13.2% (98 : 10.1%)
Core Cap Ratio : 11.0% (98 :7.9%)
Asset quality improved further
Net NPL ratio
(6-mth basis) - 7.0% (98 :9.0%)
(3-mth basis) - 9.8% (98 : 14.9%)
Closure of Corp Debt Restructuring Committee in August 2002
Winding down operations of Danamodal and Danaharta

19. 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

20. 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

21. 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
Alternative Modes of Financing
Islamic Banking & Takaful
Development Financial Institutions
Banking
Insurance
Labuan IOFC

22. 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

23. Recommendations will be implemented in Three Phases
( after 7 years)
Phase 1
(3-4 years)
(3 years)
Assimilate into global arena
Introduce new foreign competition
Intensify competitive pressure in the domestic financial sector
Enhance capacity of domestic institutions to compete
Enhance financial infrastructure
Checkpoints
Checkpoints

24. Thank You