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Governor Tan Sri Ahmad Mohd Don's Speech at the 1997 Annual Report Press Conference

Penyampai Tan Sri Dato' Ahmad Mohd Don Tempat: Kuala Lumpur Bahasa: Bilingual (English/Bahasa Malaysia) Tarikh Ucapan: 25 Mar 1998

Sebagai menepati tradisi Bank Negara Malaysia, kami dengan sukacitanya ingin mengedarkan secara rasmi Laporan Tahunan Bank Negara Malaysia bagi tahun 1997. Saya ingin memaklumkan bahawa Laporan Tahunan ini akan hanya boleh disiarkan selepas jam 6.00 petang ini.

Prestasi ekonomi pada tahun 1997

Ekonomi Malaysia berkembang pada kadar 7.8% pada tahun 1997. Keluaran Dalam Negara Kasar (KDNK) telah mencatat pertumbuhan yang pesat pada separuh pertama tahun 1997 iaitu sebanyak 8.5%. Walau bagaimanapun, menjelang suku keempat, tekanan krisis kewangan serantau ke atas ekonomi dalam negeri telah meningkat dan akibatnya kadar KDNK menjadi sederhana kepada 6.9% berbanding 7.4% pada suku ketiga (7.1% dalam separuh kedua tahun 1997).

Prestasi yang masih kukuh pada keseluruhannya ini khususnya mencerminkan kekuatan ekonomi benar yang berteraskan sektor pengeluaran yang luas, disokong oleh kekukuhan sektor eksport. Di sebalik kemunculan krisis kewangan serantau, kekukuhan pertumbuhan pada tahun 1997 adalah mencerminkan penyesuaian struktur yang telah dilaksanakan sejak beberapa tahun yang lalu. Di antaranya adalah:

  • Kemantapan sektor perbankan yang secara relatifnya berdaya tahan, dengan hutang tidak berbayar berada pada tahap yang terendah;
  • Dasar yang menghadkan pinjaman asing sektor swasta hanya kepada kegiatan yang boleh menjana pendapatan tukaran asing untuk membayar khidmat hutang telah membantu usaha membendung hutang luar agar berada pada tahap yang terkawal;
  • Hutang jangka pendek juga rendah dengan sebahagian besarnya telah dilindung nilai;
  • Mudah tunai dalam negeri adalah mencukupi untuk menyokong kegiatan ekonomi yang produktif;
  • Kadar tabungan negara kekal tinggi pada tahap 40% daripada Keluaran Negara Kasar (KNK) ketika negara berada pada tahap guna tenaga penuh, dan
  • Kadar inflasi dan pengganguran adalah rendah.

Dari segi penawaran, penyederhanaan dalam pertumbuhan KDNK benar pada tahun 1997 adalah disebabkan terutamanya oleh pertumbuhan yang lebih perlahan dalam sektor perlombongan, perkhidmatan dan pembinaan. Pertumbuhan terus disokong oleh kadar pengembangan yang lebih pesat dalam sektor perkilangan (12.5%) dan pertanian (3%), yang masih berupaya bertahan di kala berlakunya pergolakan kewangan.

Pertumbuhan yang lebih sederhana sebanyak 6.4% dalam permintaan agregat dalam negeri (7% pada tahun 1996) mencerminkan kesan negatif krisis kewangan serta dasar ekonomi makro yang lebih ketat untuk membendung pertumbuhan permintaan yang berlebihan dalam usaha mengurangkan defisit akaun semasa. Pertumbuhan yang lebih rendah dalam perbelanjaan sektor swasta adalah disebabkan oleh peningkatan yang lebih perlahan dalam penggunaan dan pelaburan, mencerminkan kesan hakisan kekayaan akibat kejatuhan harga saham.

Di sektor luaran, defisit akaun semasa dalam imbangan pembayaran meningkat sedikit kepada RM13.4 bilion, kira-kira RM1.1 bilion lebih tinggi daripada defisit yang dicatatkan pada tahun 1996. Namun begitu, bahagiannya kepada KNK kekal pada 5.1%. Berikutan penurunan nilai ringgit, pertumbuhan eksport meningkat pada kadar yang lebih pesat berbanding import dan ini secara berterusan memperbaiki kedudukan dalam imbangan pembayaran.

Tahap hutang luar negeri adalah secara relatifnya rendah. Jumlah hutang luar negeri (termasuk hutang luar negeri jangka pendek) dalam nilai dolar Amerika Syarikat hanya meningkat dengan sederhana kepada 45.6% daripada KNK pada akhir tahun 1997 (41.2% daripada KNK pada tahun 1996). Nisbah khidmat hutang masih rendah pada 5.7% (6.1% pada tahun 1996). Sebahagian besar daripada hutang luar negeri ini adalah dalam bentuk tempoh matang jangka sederhana dan jangka panjang (76%).

Kedudukan fiskal Kerajaan Persekutuan telah mencatatkan lebihan bagi tahun kelima berturut-turut, menggambarkan komitmen kerajaan kepada dasar fiskal yang berhemat serta dasar kewangan yang berdisplin. Lebihan fiskal yang dicapai pada tahun 1997 adalah di luar jangkaan iaitu sebanyak 2.5% daripada KNK (0.8% daripada KNK pada tahun 1996).

Allow me now to continue in English. As a technical briefing on the performance of the economy in 1997 was given to the press yesterday, I will now move on quickly to discuss the thrust of macroeconomic management during 1997. This will be followed by our assessment of the outlook and the issues and challenges confronting the Malaysian economy in 1998. My remarks will then focus on the performance of the banking industry and a brief discussion of developments in the insurance industry. Finally, I would like to follow-up with details of the comprehensive macroeconomic policy package announced by the Minister of Finance in Parliament yesterday (24 March 1998). A separate press release has been issued on the detailed measures in the area of monetary management, measures to strengthen the banking system, mergers of finance companies and plans for development of the financial system.

Macroeconomic policy management in 1997 had to address domestic issues as well as the rapid changes in the economic setting following the outbreak of the regional financial crisis. In the first half of 1997, the policy direction was focused on steering the economy towards a more sustainable growth path and on containing asset inflation. However, with the onset of the regional crisis since July, the focus of policy was to restore stability and confidence in the financial markets, while minimising any disruptions on the real economy.

The Government announced a number of measures in the final quarter of 1997 to strengthen balance of payments, fiscal account, and improve competitiveness. These included a 2% cut across the board in Government spending in 1997 and an 18% cutback in Federal Government expenditure in 1998.

Monetary policy was tightened further during the year to reduce credit growth and contain inflationary expectations. Interest rates increases were reinforced with further measures in the form of credit ceilings, more stringent standard for classifying non-performing loans (NPL) and provisioning, as well as requiring greater transparency on the financial positions of banking institutions.

Towards year-end and in early 1998, some distortions emerged in the intermediation process due to increased uncertainties arising from the regional financial turmoil. As a temporary measure to ensure the smooth functioning of the intermediation process, BNM provided liquidity to the system. To address these inefficiencies, a package of monetary measures was introduced in February 1998, including the reduction in the Statutory Reserve Requirement (SRR). It must be emphasised that the reduction in SRR did not provide additional liquidity to the banking system. In fact, monetary policy was tightened further. While the SRR reduction on 16 February 1998 had resulted in an injection of RM14.6 billion, BNM withdrew its direct lending by RM15.7 billion on the same day. There was, therefore, a net withdrawal of RM1.1 billion of funds from the system. As the liquidity flow improved, Bank Negara liquidity operations were reduced further to RM14.8 billion as at 14 March 1998. The substantial decline in BNM lending to the banking institutions resulted in lower reserve money. On an annual basis, reserve money, the basis for monetary growth, fell by 3.6% at the end of February, compared with an increase of 28.4% at end-1997. Consequently, M3 growth moderated from 18.5% at end-1997 to 14.7% at end-February.

Moving on to outlook and prospects for the Malaysian economy in 1998

The full impact of the currency crisis on the domestic economy is expected to be felt in 1998. The regional financial instability and the economic adjustment measures implemented in late 1997 would inevitably lead to some adjustments to the domestic economy. Overall, based on conservative assumptions, real GDP is expected to slow down to about 2-3%, after a decade of rapid growth. Notwithstanding the slowdown in growth, the latest assessment indicates that growth will remain positive in the first half of 1998 with stronger growth taking place in the second half of the year. This projection is premised on prospective developments in the international and regional environment, as well as developments in the domestic economy in the context of the Government?s macroeconomic adjustment programme. Favourable developments, such as emerging signs of restoration of regional financial stability, a stronger than expected growth in exports, particularly of electronics, and a positive response of the services sector to the depreciation, could improve the growth prospects.

However, recognising that there are also downside risks, the Government has announced a comprehensive economic package on 24 March 1998. The package aims to achieve an appropriate mix of adjustment policies that are in line with the revised economic outlook, restore confidence and set the stage for an early recovery. More importantly, the package aims to allay concerns on the health of the banking system by outlining broad-based pre-emptive measures to further strengthen the banking system. The package also addressed the issues of good corporate governance and structural adjustments in the economy.

Aggregate domestic demand in real terms is expected to decline in 1998. The main impetus to growth will emanate from the export sector. A positive development in 1998 will be the significant improvement in the balance of payments position with a large surplus in the merchandise account and a reduced current account deficit. Reflecting the positive impact of the weaker ringgit on the export sector, the contraction in import volume arising from the fiscal measures and the postponement of non-critical projects with large import content, the current account deficit is projected to narrow substantially to RM1.4 billion or 0.5% of GNP (RM13.4 billion or 5.1% of GNP in 1997). This is well below the Government?s target of 3% of GNP announced in December 1997.

On a sectoral basis, prospects are for the manufacturing sector to expand at a more rapid pace than the overall economy. The export-oriented sectors will benefit from the ringgit depreciation and recent measures to enhance productivity. Activity in the services and construction sectors, which are more affected by the financial crisis as well as policy measures to address economic imbalances, will moderate more significantly. The prospects of a decline in construction activity in 1998 will allow the market time to clear the surplus office and retail space, and high-end apartment buildings after several years of over-investment. Such a correction will contribute to a better balance in demand and supply in the construction sector and more sustainable growth in the medium term.

Following the sharp depreciation of the ringgit, inflation is expected to rise significantly due to high import costs. However, it is expected that tight monetary policy and other measures to stabilise the economy could moderate inflationary pressures so that the rate of inflation for 1998 would be contained at 7-8%.

The lower growth is also expected to result in a softening in the employment situation. Unemployment could increase to 3.5% (2.7% in 1997). This would help to moderate the pressure for wage increases in 1998.

In the face of risks of higher inflation following the unprecedented depreciation of the ringgit, monetary policy will remain tight in 1998 and will form an integral part of the economic stabilization policy package to restore macroeconomic and financial stability. Based on the forecast of GDP growth in the range of 2-3% in 1998 and significantly higher inflation of 7 to 8%, the moderation in credit growth would allow for an expansion of the monetary aggregates that is more consistent with the output growth. However, in an environment of slowing economic growth, the credit growth could moderate at a much faster pace than expected. Bank Negara Malaysia recognises that an effective allocation of resources to productive activities is a crucial element of public policy during a period of a slowdown in economic growth. Consequently, the need to maintain a tight monetary policy to fight inflation needs to be reinforced with appropriate policy adjustments to ensure an efficient functioning of the intermediation process.

The current tight liquidity position and uncertainty surrounding the financial markets have prompted banking institutions to be more cautious and exercise rigorous and stricter credit assessment. Banking institutions are also placing greater focus in strengthening rather than expanding their asset portfolios. Since business risks have increased, it is appropriate for banks to exercise greater prudence in their lending activities. However, banking institutions should not over-correct and deny financing to productive activities. At this juncture of a slowdown in economic growth, an over-adjustment by banking institutions is as detrimental to the economic health of the country as a lack of prudence. As such, banking institutions which have the capacity would be given flexibility to manage their loan portfolio provided that credit is channelled to provide working capital and finance productive activities, and prudential standards are maintained. This flexibility would not cause credit growth in the banking system to exceed 15%.

Performance of the banking system

The Malaysian banking system posted preliminary pre-tax profits of RM7.9 billion in 1997. However, the actual pre-tax profits of the banking system for 1997 is expected to be substantially lower, as banking institutions have been required to provide higher provisions in order to build up loan loss reserves and strengthen their balance sheet.

The thrust of prudential regulations thus far has been directed towards increasing the resilience of the banking system and minimising the exposure of the banking institutions? loan portfolio to vulnerable sectors of the economy. At the same time, the favourable economic performance of recent years has contributed to strong asset quality and facilitated the build up of capital and reserves to healthy levels. The industry, therefore, entered the period of financial turmoil from a position of strength. To further strengthen the banking institutions, more stringent prudential standards were imposed on the recognition of non-performing loans and provisioning, as well as requiring greater transparency on the financial positions of banking institutions. The financial crisis had, however, provided an impetus for prudential and monetary reforms to be accelerated in order to further strengthen the banking system. I will elaborate on these measures later.

Despite the persistent volatility in the foreign exchange and stock markets in the region, the banking system in Malaysia is still fundamentally strong and intact. Nonetheless, as mentioned in early December last year, while the banking system remains intact and strong, there may be some banking institutions that may face difficulties due to adverse developments in the financial markets. This was reflected in the stress test conducted by BNM which highlighted that besides Sime Bank Berhad, three other institutions would require further capitalisation should the extreme conditions materialise in order to comply with the minimum 8% risk-weighted capital ratio. The assessment was made against best international practices and stringent standards on loan classification and provisioning requirement and assumptions on worst case scenarios on NPL and provisions.

In view of the uncertainty in the financial markets, it is inevitable that non-performing loans would rise but it would remain manageable and the system would be able to cope with problems that may emerge. The NPL ratio as at end-December 1997 was at 6.8% based on the 3-month classification policy. This ratio has risen to 8.7% as at end-February 1998. BNM is actively monitoring all banking institutions and requiring them to take pre-emptive steps to manage potential areas of risk.

In making comparisons with other countries, it is important to note that in the developed countries, the accrued interest (including interest-in-suspense) is not capitalised in the principal amount of the loan. There is also no distinction between specific and general provisions. Provisions made are set off against the outstanding amount of the loan. In this regard, the NPL will be reduced by an equivalent amount of provisions made on the NPL. To allow a more meaningful comparison on NPL between the Malaysian banking sector and those of developed countries, the NPL for the banking industry would be as follows:

 

  Dec 1997 Feb 1998
M?sia* International# M?sia* International#
Commercial banks

5.7

3.9

7.0

5.3

Finance companies

9.9

7.5

13.3

10.9

Merchant banks

5.1

4.0

8.4

6.7

Banking system

6.8

4.8

8.7

6.8

* Based on Malaysian accounting treatment
# Based on international practices

 

Banking is a business of managing risks. Therefore, to ensure that these risks are properly and prudently managed, BNM has issued guidelines based on best practices with regard to risk management. Nevertheless, it is ultimately the responsibility of the stakeholders and the Board of Directors of each banking institution to play their rightful role in ensuring that adequate and effective risk management systems which commensurate with the scope, size and complexity of their operations are in place and functioning. This would be complemented by BNM?s on-site supervision of banking institutions which would assess the adequacy of the banking institutions risk management system.

Mergers would continue to be encouraged by BNM. Recognising that the finance company sector would be the more vulnerable sector, BNM has intensified its efforts to consolidate the finance company industry by promoting a merger programme for the industry. The programme is also part of an overall pre-emptive strategy of BNM to further increase the resilience of the finance companies to withstand any risk from slowdown in economic growth.

Commercial banks and insurance companies are strongly encouraged to merge now to enhance their soundness and resilience. They should take heed of the experience of the finance companies which had responded to the Government?s call only when the business environment became more difficult. These institutions should be aware of the benefits of being strong and well capitalised and consider merger with a greater sense of urgency.

BNM has also issued guidelines on lending to the Bumiputera community, housing loan commitments and lending to the small and medium-scale enterprises (SMEs) to ensure that the priority sectors continue to have access to credit. The Guidelines for loans to the Bumiputera community and housing loan commitments cover a two-year period with the deadline for compliance set at 31 March 2000, whilst the Guideline for loans of RM500,000 and below to SMEs covers a one-year period ending 31 March 1999. Details of the 1998 Lending Guideline are described in a separate Press Release.

Next, the insurance industry

Turning to the insurance industry, 1997 marked the tenth year of supervision of the industry by Bank Negara Malaysia (BNM). During this period, the insurance industry enjoyed good growth in premium income and assets. The industry has shown improvement in financial and operational discipline and in its role as an effective mobiliser of savings. But the industry is still far from achieving its full potential.

The recent developments in the economy have affected the performance of insurers, particularly their asset values. However, the industry remains sound, due to the enhanced prudential measures introduced in the Insurance Act 1996, which came into force in January 1997. Growth of the industry is expected to slow down in 1998, in line with the slowdown in the economy. The impact may be greater in the general sector, given the stronger relationship between this sector and the level of business activity.

The vulnerability of insurers to the recent volatile changes in the economy indicates the need for bigger and financially stronger companies. Insurers should therefore be prepared in terms of capital, capacity and capability ? the three Cs which were emphasised by BNM in last year?s Annual Report. The industry cannot be complacent. It must consolidate its position to withstand the changes taking place both on the domestic front and in the international scene. Mergers would offer many advantages, including the enhancement of the merged entity's financial strength, underwriting capacity and technical expertise. It is an alternative which should be seriously considered by the insurers if they are to achieve greater penetration and enhanced market position. The sooner the insurers merge voluntarily, before adverse circumstances compel them to do so, the more likely that the existing shareholders and policyholders would be able to secure greater benefits from the merger.

Amidst these challenges, the future prospects of the insurance industry in the medium and long term remain good, particularly since the industry is expected to have consolidated and strengthened during this period of adjustment. Opportunities abound. These include the increasing public awareness of the benefits of insurance protection, emerging demands for cover for specialised risks, and the advent of non-conventional distribution channels as well as new products and markets.

Finally, details of the macroeconomic stabilisation policy on the financial sector

On 24 March 1998, the Minister of Finance revealed to Parliament a comprehensive set of policy measures. The measures encompass all aspects of economic management from fiscal and monetary policies to issues of governance, and structural changes including price controls. A significant part of the package covers the financial sector. I would like to elaborate on these measures. Further details can be obtained from the press release on the policy package.

The uncertainties facing the economy requires that the Government and the Bank review the macroeconomic outlook more frequently. As the outlook changes, policy must also adapt to these changes, not only to be relevant but to ensure that economic adjustment and its eventual recovery will always be on track.

As I indicated earlier, the outlook for 1998 has changed significantly since the last policy announcement in December 1997. This policy package is consistent with the revised outlook. It is also directed at informing the public of the comprehensive measures to strengthen further the banking system as well as the direction of policy to address inflation and promote exchange rate stability. The Bank will, from time to time, inform the public of developments in relevant economic variables to indicate progress in implementing this policy package which is designed to restore economic recovery.

The financial sector part of the macroeconomic policy package comprise the following:

(i)  Monetary management

Based on the macroeconomic forecast of GDP growth of 2-3% and inflation of 7-8%, the present policy to moderate growth in bank credit and monetary aggregates will be continued:

  • M3 growth of 12% would be consistent with the revised GDP and inflation rates.
  • The interest rate policy will continue to be flexible.
    • Interest rates will remain as the monetary policy instrument. The 3-month interbank rate will continue as the intermediate target.
    • The underlying interest rate will be adjusted in line with inflation expectations due to demand pressures. The objective is to maintain an attractive real positive rate of return to depositors.
    • In the day to day management, the Bank will continue to have the option of using interest rates to support intervention operations to stabilise the ringgit exchange rate.
    • Credit growth will moderate to about 12-15% in line with the October 1997 credit plans of the banking institutions and the March 1997 guidelines on loans to property and shares.

It is also recognised that in a business environment severely affected by the depreciation of the currency and banks? concern over their balance sheets, availability of credit is important to facilitate commercial transactions. Hence, individual banking institutions which have the capacity would be given the flexibility to manage their loan portfolio, provided credit is channelled to finance working capital and productive activities, including export-oriented industries.

Bank Negara Malaysia will review its present practice of limiting the maximum margin which may be added to the market-determined BLR.

Over the next few months, further measures would be implemented to remove distortions and enhance efficiency in the interbank and loan markets as well as facilitate efficient allocation of liquidity. Towards this end, the role of the SRR and LAR is being reviewed. In the immediate term and under current circumstances, the SRR will be maintained at 10%. However, to allow banking institutions greater flexibility in managing their assets and liabilities, the Bank intends to widen the daily band for averaging of balances to meet the SRR.

To enhance policy signals to the market, the Bank will provide information on a daily basis to market participants on the Bank?s operations and its impact on liquidity.

(ii)  Strengthening the banking system

Notwithstanding the results of the stress test which revealed that the banking system remains resilient during this difficult period, BNM would further intensify the supervision of banking institutions, focusing on early identification of problems and taking pre-emptive actions to require institutions to raise capital. Maintaining a sound and strong banking system remains a core objective of BNM. Therefore, BNM will forge ahead with efforts to further strengthen the banking system in terms of sound banking practices, stronger prudential regulations and supervision and greater transparency. Against this background, BNM will pursue the following policies and introduce the following measures:

(a)  To continue to subject all banking institutions to the intensive and rigorous supervision, including stress testing their positions each month and encouraging banking institutions to perform similar tests. Banking institutions would be required to take corrective actions well before they reach the point where they require additional capital. These will include the requirement to build up provisions, limitations on credit growth and restraints on dividend payments. Banking institutions will also be required to submit concrete plans to raise additional capital within a specified period if there is a risk that the institution may not be able to comply with the minimum capital adequacy ratio of 8%.

(b)  There will be greater transparency on the financial position of the individual banking institution and the banking system as a whole. With immediate effect, banking institutions will be required to publish data on key indicators of financial soundness, including capital adequacy and NPL every financial quarter not later than six weeks after the close of the financial quarter. The disclosure of such information will complement the monthly publication of capital adequacy, NPL and provisioning levels of commercial banks, finance companies and merchant banks by BNM. BNM will also collate and publish, for the convenience of market participants, tables showing key indicators for individual institutions based on the data that they publish themselves. In addition, the breakdown of NPL by economic sector would be published by BNM every quarter beginning March this year.

(c)  The loan classification and provisioning standards will be streamlined and kept in line with best international practices. Specifically, with effect from financial year 1998, the practice of providing 20% specific provisions against the uncollateralised portion of sub-standard loans will be a standard requirement for all banking institutions. In addition, BNM will also require banking institutions to set aside provisions for off-balance sheet items where the banking institution faces credit risk from failure of counterparties to fulfil their contractual obligations.

(d)  Currently, banking institutions are required to comply with the minimum 8% risk-weighted capital ratio (RWCR) on a consolidated basis (i.e. taking into account the position of all subsidiaries) annually. With immediate effect, banking institutions will be required to comply with the consolidated RWCR on a quarterly basis. The minimum RWCR requirement for the finance companies will also be gradually raised from the present level of 8% to 10% with an interim ratio of 9% to be achieved by end of 1998 and 10% by the end of 1999, to reflect the relatively higher risk profile of finance company business.

(e)  To expand the current capital adequacy framework to incorporate market risks.

(f)  The minimum capital funds for finance companies will be raised from RM5 million to RM600 million with an interim target of RM300 million to be achieved by end-June 1999 and RM600 million by the end of year 2000. Consequently, the minimum RWCR and capital funds of commercial banks and merchant banks will also be reviewed.

(g)  The guidelines on lending to a single customer will be further tightened. With immediate effect, the limit on single customer exposure will be reduced from 30% to 25% of total capital and banking institutions will be required to comply with the single customer limit on a consolidated basis. In cases where the consolidated single customer limit have already exceeded the 25% limit, banking institutions would be allowed to run these facililities to maturity. However, the banking institution concerned will not be allowed to grant new loans or renew existing facilities in excess of the limit until the single customer limit has been regularised.

(iii)  Merger programme for finance companies

The main objective of the merger programme is to consolidate the finance company industry. The programme is also part of an overall pre-emptive strategy of BNM to further increase the resilience of the finance companies to withstand any risk from a slowdown in economic growth. The merger of finance companies are progressing well with eight announcements made so far. It is expected that another 20 of such announcements would be made before the March 31 deadline. With these mergers, the number of finance companies would be reduced from 39 to around 10 institutions.

The merger programme is in an advanced state, and is based on the following principles:

  • The programme is market driven with BNM only facilitating the process. Mergers would only be allowed if the merged entity would be fully capitalised. Final approval would be contingent upon the completion of upfront due diligence by reputable international accounting firms. The due diligence would also assess the possible further deterioration in asset quality during the course of the year and would be taken into account in the determination of net tangible assets (NTA) of the selling institution.
  • In cases where the assets and liabilities of the finance company are absorbed by their parent commercial bank, the commercial banks will be allowed to convert some of the finance company branches to commercial branches. Foreign-owned banks that absorb the business of their finance company subsidiaries will be given consideration to relocate the same number of their existing bank branches.
  • To ensure that the financial position of the acquiring company is not weakened, the Government will extend a one year guarantee against any further reduction in value of the acquired assets. In view of the strict due diligence process, the potential for guarantees to be called upon may not be significant. Any potential use of government resources would be undertaken in a consistent, explicit and transparent way, through direct government assistance built into the budgetary framework, or through explicitly quantified tax credits. The Government?s interests will be protected throughout the merger process (from the commencement of due diligence through final closure of the merger process) to ensure that claims on Government are fully substantiated.
  • The acquiring institutions are given the flexibility to implement cost rationalisation measures to realise the maximum benefits from the merger.
  • Any individual institutions that elect to stay out of the merger programme will be required to demonstrate its ability and commitment to comply with the new minimum capital requirement. If the finance company is unable to comply with this requirement, the appropriate action as provided by the Banking and Financial Institutions Act 1989, would apply.

After the consolidation of the finance company industry has been completed, and to ensure that the industry operates in a viable business environment, the Government will be reviewing the regulatory framework governing the operations of finance companies as well the scope of finance company activities.

(iv)  Development of the financial system

As part of measures to facilitate use of more market-oriented monetary policy instruments as well as to reduce concentration of risks in the banking system, the Bank needs to expedite measures to develop the securities markets and other aspects of the financial system. Development of the financial market will focus on the following:

  • Efficiency in monetary management will be achieved through development of indirect monetary instruments to replace uncollateralised deposit placements. Greater choices in monetary instruments will increase flexibility in liquidity management.
  • Market development of the financial system would involve increasing the players and alternative approaches to financing in order to spread credit risks and provide funding with the appropriate maturity structures. Work is already underway to develop the benchmark yield curve to pave the way for development of the bond market. Other measures include review of prudential/ investment rules for financial institutions. In the foreign exchange area, further liberalisation of rules will be undertaken at an appropriate time to enhance the ability of businesses to manage their foreign exchange exposure.
  • Infrastructure development in terms of institutional, legal and accounting framework will be implemented in tandem with market development. The financial infrastructure will also be enhanced through an improved payments and settlement system.

While measures to develop the financial system must be expedited, it cannot be implemented without careful study. Many of the measures will be implemented in stages. However, there are several areas where work has commenced and will be implemented during the course of this year. The time-table for implementation is attached in the press release on the "Stabilisation Package for the Financial Sector."

 

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