Bank Negara Malaysia Strengthens Regulations on Disposal and Purchase of Impaired Loans/Financing
Bank Negara Malaysia (“BNM”) has introduced enhanced requirements through the Policy Document on the Disposal and Purchase of Impaired Loans/Financing (“Policy Document”), which came into effect on 25 June 2024.
The Policy Document aims to encourage more buyers for the impaired loans/financing market, providing better protection to borrowers and elevating efficiency in disposal and purchasing of impaired loans/ financing.[1] Accordingly, the Policy Document covers requirements prior to and post the disposal and purchase of impaired loans/financing.[2]
This Policy Document applies to licensed banks, licensed investment banks, licensed Islamic banks (excluding international Islamic banks) and non-bank buyers.
This article summarises notable provisions of the Policy Document.
Section 100 of the Financial Services Act 2013 and section 112 of the Islamic Financial Services Act 2013 allows parties intending to enter into any agreement or arrangement to transfer the whole or any part of the business of a licensed person. They are required to submit a joint application to obtain BNM’s approval prior to effecting such agreement or arrangement.
Loans/financing eligibility criteria
From the seller’s perspective, the following criteria must be met prior to submitting the joint application:
(a) whichever occurs earlier:
(i) the impaired loans/ financing remains classified as impaired for a minimum period of 12 months from the date it was first classified as impaired; or
(ii) all reasonable efforts to recover the impaired loans/financing have been exhausted by the seller; and
(b) the impaired loans/financing must not be loans/financing that was granted for or linked to projects of strategic importance.[3]
Further, a seller must only sell such impaired loans/financing to the following parties:
(a) domestic banking institutions or locally incorporated foreign banking institutions in Malaysia; or
(b) non-banking institutions that are locally incorporated and are a resident for tax purposes.
From the buyer’s perspective, the following criteria must be met:
(a) proven track record in debt management and recovery, and minimal complaints against its debt management and recovery practices;
(b) adopted satisfactory recovery approaches, including having a dedicated unit with competent personnel to effectively manage debt collection and complaints from borrowers;
(c) adequate and competent staff with recognised qualifications from reputable institutions of higher learning, or adequate knowledge and training, including, if applicable, in Islamic banking and finance or Shariah law; and
(d) where a buyer has the intention to outsource the collection or recovery of the impaired loans/financing to a service provider, the buyer must meet the above criteria.
Note that the buyer must comply with the above requirements on a continuous basis, even after receiving approval from BNM.
Business conduct requirements
From the seller’s perspective, a written notification must be given to affected borrowers of its intention to dispose of its impaired loans/financing to buyer within 90 calendar days prior to entering into an agreement or arrangement for the disposal of the impaired land/financing to the buyer.
The seller must allow borrowers a period of 90 days from the date of the notice to regulate and settle their outstanding loans/financing, before entering into an agreement or arrangement for the disposal of the impaired loans/financing to the buyer.
Upon completion of the disposal of impaired loans/financing, the seller must give written notification to the affected borrowers on the following within seven days:
(a) completion of the disposal, including name and contact number of the buyer; and
(b) all complaints or any matters related to such impaired loans/financing prior to completion of the disposal shall be directed to the seller.
From the buyer’s perspective, the buyer must inform the affected borrowers within seven days of the completion of disposal that:
(a) any complaints or queries pertaining to the purchase, management and recovery procedures of the impaired loans/financing must first be directed to the buyer, unless the complaint or query relates to matters prior to the completion date of the purchase of the impaired loans/financing; and
(b) if the affected borrowers are not satisfied with the decision of the buyer on the complaints or queries raised, the buyer must inform the affected borrowers on the availability of alternative redress avenues.
Other Requirements
1. Accounting Treatment
A seller must recognise any losses that may arise at the point of the completion of the disposal of the impaired loans/financing to a buyer.
A buyer that is a banking institution must at all times comply with paragraph 10 of the Policy Document on Financial Reporting or the Policy Document on Financial Reporting for Islamic Banking Institutions and the Malaysian Financial Reporting Standards (MFRS9), as the case may be.
2. Disposal of impaired loans/financing to entities within the same group
In a situation where the seller and buyer are banking institutions within the same group, they shall ensure that for purposes of accounting, the impaired loans/financing are consolidated at the group level.
3. Additional requirements for Non-bank Buyers
Note that BNM has clearly set out additional requirements to be complied by non-bank buyers, once the non-bank buyer assumes the rights and titles to such impaired loans/financing.
Frequently Asked Questions
To clarify and assist in understanding some of the provisions of the Policy Document, BNM has issued a set of Frequently Asked Questions on the Policy Document on 25 June 2024. This document can be accessed here.
Conclusion
The enhanced Policy Document provides comprehensive definitions, explanations and clear requirements. Key provisions include stricter eligibility criteria for sellers, increased requirements for buyers, particularly non-bank buyers, and strengthened borrower protection measures. The policy also outlines accounting treatments and prohibits onward sales of impaired loans.
Further, the enhanced Policy Document eliminates the 49% foreign ownership limit found in the previous guideline and introduces stringent safeguards to protect borrowers. In addition, third-party buyers must now demonstrate a proven track record in debt management and recovery.
The notification period to borrowers regarding the intention of sellers to dispose the impaired loans/financing is also clearly set out in the Policy Document. The 90-day notification period mandate enhances transparency and fairness for affected borrowers.
If you have any questions or require any additional information, please contact Chan Xian Ai, or the Zaid Ibrahim & Co (in association with KPMG Law) partner you usually deal with.
This alert is for general information only and is not a substitute for legal advice.
[1] Bank Negara Malaysia, ‘ Policy Document on Disposal and Purchase of Impaired Loans/Financing’ <https://www.bnm.gov.my/-/pd-dpil-en > accessed 26 July 2024.
[2] Policy Document on Disposal and Purchase of Impaired Loans/Financing, para 1.4.
[3] This includes loans/financing granted for or related to national infrastructure projects (such as, in the area of transportation, telecommunications, energy, logistics and utilities), as well as those identified by the Government as strategic through its various developmental plans (such as projects involving circular economy, integrated water resource management and digital connectivity under the 12th Malaysia Plan 2021-2025).