On 25 June 2024, Bank Negara Malaysia (“BNM”) issued a policy document (“PD”) on the Disposal and Purchase of Impaired Loans/Financing after considering and taking into account feedback received in relation to the Exposure Draft on Disposal and Purchase of Impaired Loans/Financing issued by BNM in June 2023. The PD came into effect on 25 June 2024.
Banking institutions are generally allowed to dispose of impaired loans/financing to specialised entities to leverage on their recovery expertise. This is one way that banking institutions can effectively manage their balance sheets.
The PD aims to enhance the requirements relating to the disposal and purchase of impaired loans/financing to ensure the process involved is conducted efficiently without compromising the rights and interest of the affected borrowers.
This summary highlights salient points from the PD.
Applicability
The PD is only applicable to a disposal and purchase of impaired loans/financing which is on a non-recourse basis. Any disposal and purchase of impaired loans/financing through other arrangements such as asset securitisation transactions or the disposal and purchase of loans/financing which are not impaired do not fall within the scope of the PD. The PD applies to the following entities:
(i) licensed banks;
(ii) licensed investment banks;
(iii) licensed Islamic banks; and
(iv) non-bank buyers.
Approval
Pursuant to section 100 of the Financial Services Act 2013 (“FSA”) and section 112 of the Islamic Financial Services Act 2013 (“IFSA”), parties intending to enter into any agreement or arrangement to transfer the whole or any part of the business of a licensed person (including a disposal or purchase of impaired loans/financing by a banking institution to another banking institution or impaired loan/financing buyer) are required to obtain BNM’s approval prior to effecting such agreement or arrangement. In the event that the proposed disposal or purchase constitutes a transfer of the whole or a material part of the banking institution’s business, BNM will seek the concurrence of the Minister of Finance.
Pursuant to Section 100(3) of the FSA and section 112(3) of the IFSA, an application for a disposal and purchase is required to be submitted jointly by the seller and the buyer to BNM (together with other information or documents set out in the PD and as required by BNM).
Eligibility criteria
The seller must ensure that the following criteria have been satisfied prior to submitting the joint application to BNM:
(a) the earlier of the following:
(i) the impaired loans/financing remain classified as impaired for a minimum period of twelve (12) months from the date which such loans/financing were first classified as impaired; or
(ii) all reasonable efforts to recover the impaired loans/financing have been exhausted by the seller (this refers to recovery efforts within the banking institutions’ control, e.g. making calls, sending reminders and notices and serving legal action); and
(b) the impaired loans/financing must not be loans/financing that was granted for or linked to projects of strategic importance (e.g. national infrastructure projects or identified by the Government as strategic through its various development plans).
The seller shall only sell 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 in Malaysia and are residents for tax purposes.
Business conduct requirements
The seller is required to, within the time frames prescribed in the PD:
(i) notify affected borrowers of its intention to dispose of its impaired loans/financing to the buyer;
(ii) allow a period for the affected borrowers to regularise or settle their loans/financing; and
(iii) upon completion of the disposal, notify the affected buyers:
(aa) of the fact that the disposal is completed and the name and contact number of the buyer; and
(bb) that all complaints related to such impaired loans/financing prior to the completion of the disposal shall be promptly directed to the seller.
Upon completion of the purchase of the impaired loans/financing, the buyer is required to inform the borrowers that any complaints related to such impaired loans/financing are to be first directed to the buyer and, if borrowers are not satisfied with the decision of the buyer on the complaints/queries, raised, to inform the borrowers on the availability of alternative redress avenues as set out in the PD.
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.
In circumstances where the seller and buyer are banking institutions within the same group, the seller and buyer shall ensure that for purposes of accounting, the impaired loans/financing are consolidated at the group level.
Additional Requirements for Non-Bank Buyers
The PD also sets out additional requirements for non-bank buyers, including:
(a) business conduct requirements;
(b) requirements for complaints handling;
(c) fair debt collection practices;
(d) requirements for the management of borrowers’ information;
(e) requirements for the appointment of outsourced service providers;
(f) the appointment of an independent party to conduct an assessment on the buyer’s compliance with the conditions imposed by BNM (where required by BNM); and
(g) the prohibition on onward disposal of impaired loans/financing.
Appendix 1 of the PD contains the template for the Application for Disposal and Purchase of Impaired Loans/Financing.
The PD can be accessed here and the FAQs can be accessed here.
Summary by Priya Sirisena (Partner) and Chui Jun Wei (Partner) of the Banking and Finance practice at Adnan Sundra & Low
For further information, please email enquiry@adnansundralow.com.
This alert contains general information only. It does not constitute legal advice or an expression of legal opinion and should not be relied upon as such.