Since the onset of the financial crisis last year, Bank Negara Malaysia had instituted a number of measures which amongst others included tighter loan classification policy for non-performing loans and a limit on lending for the purchase of shares. Since then, the prolonged financial crisis had adversely affected the real economy, resulting in real GDP contracting by 4.8% during the first half of 1998. To contain the severity of the economic contraction, a stimulus package has been introduced and a number of measures have been put in place to promote lending activities in order to quickly revive the Malaysian economy.

It is recognised that the health of the banking system is highly dependent on a strong and stable economic environment. In this regard, the role of the banking system in promoting economic activities through their intermediation process is highly critical. To ensure that the banking system is able to effectively play its role to promote economic recovery, Bank Negara Malaysia has implemented the following measures, which will be effective financial year beginning 1 January 1998:-

1. The default period for classifying a loan as non-performing by banking institutions will be increased from three to six months;

2. Banking institutions will no longer be automatically required to provide a 20% specific provision on sub-standard loans. The quantum of provisioning for the sub-standard loans will be assessed for each banking institution by Bank Negara Malaysia during the approval of half-year and annual accounts. The amount of provisioning required would be dependent on the adequacy of the respective banking institution’s loan loss coverage; and

3. For non-performing loans which have been restructured or rescheduled, such loans may be reclassified as performing loans when the repayments under the rescheduled terms are complied with for a continuous period of 6 months, instead of the current practice which requires 12 months of continuous payment.

Effective immediately, the limit on loans for the purchase of shares and units of unit trust funds will be increased from 15% to 20% of total outstanding loans for the commercial banks and finance companies. The limit for merchant banks remains at 30%.

To ensure continued financing for viable businesses and projects, banking institutions should not withdraw facilities from their customers, based solely on problems that the customers have with other banking institutions.

Given the fact that the net non-performing loans of the banking system are more than adequately covered at 150%, the above changes will not affect the strength of the banking system. On the contrary, by promoting economic activity, the above measures are expected to strengthen further the banking system in line with the turnaround of the Malaysian economy. Bank Negara Malaysia remains committed to promote a sound banking system with effective regulatory and supervisory standards. The restructuring of the banking system will continue using the vehicles of Danamodal and Danaharta.

A detailed circular on this subject will be issued to all banking institutions for purposes of implementing these measures.

Tan Sri Dato' Seri Ali Abul Hassan bin Sulaiman
Gabenor Bank Negara Malaysia