4.1 Financial and corporate sector reform in Malaysia
Malaysia’s experience of financial restructuring differed from the other crisis countries in two aspects. First, Malaysia began with a stronger financial sector. Before the crisis it had developed more effective bankruptcy and foreclosure laws, as well as a stronger supervisory capacity. The banking sector was also well capitalized, with capital-asset rations exceeding 10 per cent. Nonetheless, the deepness of the regional financial crisis, and its effects on the domestic economy, together with the high level of non-performing loans (NPLs), led the authorities to introduce a number of measures to promote the consolidation of the industry and enhance its competitiveness. Second, as noted above, Malaysia altered its macro-economic course in September 1998, choosing to impose capital controls rather than accept an IMF rescue package (ADB 2000).
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Prior to the crisis, official indicators of the Malaysian financial system’s soundness had actually improves significantly during the year: the ratio of NPL’s to total loans in banks and finance companies fell from 20 per cent in 1990 to about 3.8 per cent for banks and 4.7 per cent for finance companies in 1996(Lindgren et al. 1999). However, the persistent pace of credit expansion at an annual rate of nearly 30 per cent to the private sector (particularly to the property sector and for the purchase of stock and shares) exposed the financial system to potential risks from the price declines in property and other assets that occurred in 1997. In response to these deficiencies, the central bank (Bank Negara Malaysia, BNM ) had earlier imposed limits on propoty lending – 20 per cent of total loans – and securities lending for the purchase of shares, effective on 1 April 1997. In October 1997, the authorities issued a new directive that no new loans should be approved for the property sector, except for low-income housing. Banks were asked to summit credit plans for 1998 to medermoderate growth of the banking system to 20 per cent by March 1998 and 15 per cent by end -1998.
The combination of the economic slowdown, decline in asset values, rising interest rates, and the depreciation of the ringgit severely affected the level of credit performance and bank profitability. As the regional crisis deepened, concerns about the true conditions of the financial system increased, and were relate to: (1) the exceptionally fast rate of growth of credit in the banking system; (2) the exceptionally-high leverage of the private sector (163 per cent); (3) the concentration; and (4) the decline in asset qualities given the slowdown in economic activity.
The authorities announced several measures, effective on 1 January 1998, including a requirement for banks to classify loans as nonperforming when they were three months overdue; an acceleration of the classification of doubtful loans from 12 months overdue to six months, and bad loans from 24 to 12 months; and a rise n the required general loan-loss reserves from 1 per cent to at least 1.5 per cent.
On March 25 , 1998, the authorities announced a package of measures aimed at strengthening the financial system. The measures focused on:
- Broad-based strengthening of the regulatory and supervisory framework requirements for increased disclosure;
- Strengthening the finance company sector through consolidation into a smaller number of core companies;
- Pre-emptive re capitalization of bank.
The measures also included initiatives to improve the framework fao bank liquidity management and monetary operations.