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Bank Negara issues Policy Document on Disposal and Purchase of Impaired Loans/ Financing

02 July 2024

Bank Negara Malaysia (“BNM”) issued a Policy Document on Disposal and Purchase of Impaired Loans/ Financing (“Policy Document”) on 25 June 2024. The Policy Document came into force on its date of issuance.
 
The Policy Document arises from an exposure draft of the Policy Document issued by BNM on 19 June 2023.
 
We highlight below some of the salient provisions of the Policy Document.
 
General
 
Part B (General Requirements) and Part D (Submission of Application) of the Policy Document apply to:
  1. Licensed banks under the Financial Services Act 2013 (“FSA”);
  2. Licensed investment banks under the FSA;
  3. Licensed Islamic banks (excluding licensed international Islamic banks) under the Islamic Financial Services Act 2013 (“IFSA”); and
  4. Non-bank buyers1 (severally a “non-bank buyer” and collectively “non-bank buyers”). 
Part C (Additional Requirements for Non-Bank Buyers) of the Policy Document applies to non-bank buyers.
 
The Policy Document supersedes the following:
  1. Guidelines on Disposal/Purchase of Non-Performing Loans by Banking Institutions dated 29 June 2007; and

  2. Guidelines on the Disposal/Purchase of Non-Performing Financing by Islamic Banks dated 29 June 2007. 
Application and procedures
 
The Policy Document will only apply to a disposal and purchase of impaired loans/financing which is on a non-recourse basis.2
 
An application for approval of a disposal and purchase of impaired loans/financing3 is to be submitted jointly by the seller and buyer to BNM (“joint application”) for approval under section 100 of the FSA or section 112 of the IFSA (as applicable), together with documents or information referred to in Part D of the Policy Document as well as any other information as may be specified by BNM. If the proposed disposal or purchase of impaired loans/financing constitutes a transfer of the whole or a material4 part of the banking institution’s business, BNM will seek the concurrence of the Minister of Finance under section 100(4) of the FSA or section 112(4) of the IFSA, as applicable.
 
Loans/financing eligibility criteria
 
Before submitting the joint application, the seller must ensure that the following criteria are satisfied:
  1. whichever of the following criteria which occurs earlier:
  • the impaired loans/financing remain classified as impaired for a minimum period of 12 months from the date on which such loans/financing were first classified as impaired; or

  • the seller has exhausted all reasonable efforts to recover the impaired loans/financing5; and
  1. the impaired loans/financing must not be financing that was granted for or linked to projects of strategic importance6. 
Buyer eligibility criteria
 
A seller shall only sell its impaired loans/financing to the following parties subject to the relevant prior written approval of BNM under section 100(6) of the FSA or section 112(6) of the IFSA:
  1. domestic banking institutions7 or locally incorporated foreign banking institutions in Malaysia; or

  2. non-banking institutions that are incorporated in Malaysia and are tax residents in Malaysia. 
A buyer must ensure that the following requirements are complied with for the purposes of submitting the joint application, and if the joint application is approved, on a continuing basis:
  1. the buyer has a proven track record in debt management and recovery, and there are minimal adverse complaints, written or otherwise, against its debt management and recovery practices;

  2. the buyer has adopted satisfactory recovery approaches, including having a dedicated unit with competent personnel to effectively manage debt collection and any complaints from the borrowers/customers;

  3. the buyer has 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

  4. where a buyer intends to outsource the collection or recovery of the impaired loans/financing to a service provider, the buyer must ensure that the service provider meets the criteria specified in paragraphs (a) to (c) above. 
Responsibilities of the board and senior management
 
The responsibilities which the board and senior management of the buyer and seller of impaired loans/financing are expected to comply with are set out in paragraphs 10.1 and 10.2 and paragraphs 10.3 to 10.5 respectively of the Policy Document. Among others, the board must ensure that all risks and implications arising from the disposal or purchase of impaired loans/financing, including financial, legal, reputational and if applicable, Shariah, risks at both entity and group levels are appropriately managed.
 
The seller’s senior management is responsible for ensuring effective implementation of the policies, procedures and controls on the disposal or purchase of impaired loans/financing, as approved by its board.
 
In relation to the disposal and purchase of impaired financing:
  1. the seller’s senior management must ensure that the implementation of policies and transactions carried out in respect of the disposal of impaired financing comply with Shariah requirements and is approved by its Shariah Committee;

  2. where the buyer is a licensed Islamic bank, its senior management must ensure that the implementation of policies and transactions carried out in respect of the purchase of impaired financing comply with Shariah requirements and is approved by its Shariah Committee; and

  3. where the buyer is not a licensed Islamic bank, its senior management must ensure that the implementation of policies and transactions carried out in respect of the purchase of impaired financing comply with Shariah requirements8.9
 Business conduct requirements
 
Seller of impaired loans/financing
 
The seller must notify the affected borrowers/customers in writing of its intention to dispose of its impaired loans/financing to a buyer no later than 90 calendar days prior to entering into an agreement or arrangement for the disposal of the impaired loans/financing to the buyer (“transaction document”).
 
The seller must allow a period of 90 calendar days from the date of the notice referred to in the preceding paragraph for the affected borrowers/customers to regularise or settle their outstanding loans/financing, before it enters into the transaction document.
 
The seller must notify the affected borrowers/customers in writing of the following within seven calendar days of the completion of the disposal of the impaired loans/financing where the buyer assumes the rights and title to such impaired loans/financing:
  1. the fact that the disposal is completed, including the name and contact number of the buyer; and

  2. that all complaints or any matters relating to such impaired loans/financing prior to the completion date are to be promptly directed to the seller. 
When the impaired loans/financing are sold to a non-bank buyer who does not have access to the Central Credit Reference and Information System (“CCRIS”), and the seller receives a written request from the non-bank buyer10 or a written notification by the borrower/customer11 that the borrower/customer has fully settled the impaired loans/financing with the non-bank buyer, the seller must:
  1. update the status of the borrower/customer to ‘Settled’ within seven working days from the date the seller receives the request from the non-bank buyer or notification by the borrower/customer; and

  2. notify the borrower/customer within seven calendar days from updating the borrower’s/customer’s status in the CCRIS, that such status has been updated. 
Buyer of impaired loans/financing
 
The buyer must, within seven calendar days from the completion date of the purchase of the impaired loans/financing, inform the affected borrowers/customers in writing that:
  1. any complaints or queries on matters 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; and

  2. if the affected borrowers/customers are not satisfied with the decision of the buyer on the complaints or queries raised with the buyer under paragraph (a) above, the buyer must inform the affected borrowers/customers that they may avail themselves of the alternative redress avenues via BNMLINK for complaints or enquiries, or the Ombudsman for Financial Services for disputes. 
Upon the completion date, the buyer shall:
  1. for impaired loans/financing that are under the debt management programme (“DMP”) of the Agensi Kaunseling dan Pengurusan Kredit12 (“AKPK”), comply with the debt repayment plan and the terms and conditions set by AKPK; and

  2. for impaired loans/financing that are not yet under AKPK’s DMP:
  • allow borrowers/customers that are facing financial distress to seek AKPK’s services;

  • negotiate and work out a debt repayment plan with AKPK for borrowers/customers who have debts with multiple creditors; and

  • comply with the DMP and terms and conditions set by AKPK where the buyer and the borrowers/customers have agreed to reschedule or restructure such impaired loans/ financing. 
Other requirements
 
Accounting treatment
 
A seller must recognise any losses that may arise at the point of completion of the disposal of the impaired loans/financing to the 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.
 
Disposal of impaired loans/financing to entities within the same group
 
Where a 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
 
Part C (paragraphs 13.1 to 13.44) of the Policy Document sets out additional requirements that non-bank buyers are required to comply with in relation to its purchase of impaired loans/financing. Among these are the following:
 
Debt recovery commitments
 
To disclose the non-bank buyer’s commitment on debt recovery (including, if applicable, assurances that its business and conduct comply with Shariah requirements at all times) and how it intends to implement such commitments in a prominent and transparent manner, such as by publishing a charter or notice on its website or at its office or direct notification to affected borrowers/customers.13
 
Procedures on settlement of impaired loans/financing
 
Within seven calendar days from the full settlement of an impaired loan/financing by a borrower/customer, the non-bank buyer shall provide:
  1. documentary evidence to the borrower/customer that the non-bank buyer has requested the seller to update the borrower’s/customer’s status in the CCRIS; or

  2. the necessary documents to the borrower/customer for the borrower/customer to notify the seller to update the borrower’s/customer’s status in the CCRIS. 
Complaints handling
 
Detailed requirements are set out in paragraphs 13.4 to 13.12 of the Policy Document on various aspects of a non-bank buyer’s procedures for handling complaints by borrowers/customers. These include prescribed time periods for resolving the complaints and the requirement to maintain written records of actions taken and decisions made, which are to be made available for inspection upon request by BNM.
 
Fair debt collection practices
 
The debt collection practices to be adopted by a non-bank buyer must conform to the fair debt collection practices set out in paragraphs 13.13 to 13.26 of the Policy Document. These include regulating the conduct of debt collectors (including outsourced providers of such services) appointed by a non-bank buyer, collection of payments from borrowers/customers and ensuring that information on the name and address of the borrower/customer and the outstanding amount to be recovered from the borrower/customer are up to date and accurate.
 
Paragraph 13.21 seeks to protect the privacy of the borrower/customer and other parties by prohibiting various conduct by a debt collector, such as generally restricting communication only between 8.00 a.m. to 9.00 p.m., harassing or intimidating the borrower/customer or harassing his family, relatives, neighbours, friends, colleagues or employer, and prescribing the circumstances in which a debt collector may visit the workplace of the borrower/customer.
 
A debt collector is also prohibited from making attempts to recover the debts, directly or indirectly from third parties, such as family members, friends, relatives, colleagues or the employer of the borrower/customer.
 
A non-bank buyer is required to establish monitoring mechanisms and conduct regular reviews to ensure compliance by their debt collectors with the requirements of Part C of the Policy Document. It is accountable to borrowers/customers for any complaints against its debt collectors and must not disclaim responsibility for the misconduct of the latter.
 
Transparency and disclosure requirements
 
A non-bank buyer is required to pay due regard to the information needs of the borrower/customer by adopting the following disclosure principles: (i) timely; (ii) clear and simple; (iii) accurate, relevant and sufficient; (iv) highlight important information; and (v) consistent and comparable. In addition, the Policy Document also sets out continuing requirements relating to the following:
  1. providing notice of changes to the terms and conditions and the borrower’s/customer’s rights and obligations at least 21 calendar days before the changes become effective;

  2. providing statements (including electronic statements) at regular intervals14 to the borrower/customer without charge to communicate important information; and

  3. making disclosure following a specific request.15
 Management of borrower’s/customer’s information
 
Measures that a non-bank buyer is required to implement to preserve borrower’s/customer’s information against theft, loss, misuse or unauthorised access, modification or disclosure by whatsoever means are set out in paragraphs 13.29 to 13.34 of the Policy Document. These measures include: 
  1. deploying preventive and detective information and communication technology to prevent theft, loss, misuse or unauthorised access, modification or disclosure of borrower’s/customer’s information and to detect errors and irregularities when they occur; 

  2. ensuring the role profile of its staff includes a description on the type and level of access to borrower’s/customer’s information to enable its staff to perform their jobs effectively without compromising the preservation of secrecy of borrower’s/customer’s information; 

  3. providing adequate training and issuing regular reminders to its staff who have access to borrower’s/customer’s information on their obligations to handle borrower’s/customer’s information with due care; 

  4. ensuring that its employment contracts contain a provision requiring its staff to sign a confidentiality undertaking that clearly specifies the obligation to safeguard borrower’s/customer’s information and the consequences for failure to comply with such obligations; and 

  5. establishing effective mechanisms for prompt detection of any breaches of borrower’s/customer’s information as well as robust breach containment and handling response plans, which plans must be immediately activated in the event of any theft, loss, misuse or unauthorised access, modification or disclosure of borrower’s/customer’s information. 
Obligations relating to outsourced services
 
The Policy Document permits a non-bank buyer to outsource services and functions subject to the overriding condition that such arrangements do not create undue risks of harm to the borrowers/customers. A non-bank buyer is expected to maintain appropriate oversight over the outsourcing arrangement and ensure that the borrowers/customers are not worse-off. Specific requirements on outsourcing are set out in paragraphs 13.35 to 13.42 of the Policy Document.
 
Third-party compliance assessment
 
Where required by BNM, a non-bank buyer shall appoint an independent party as may be specified by BNM to conduct an assessment on the buyer’s compliance with the conditions imposed by BNM. In such event, a non-bank buyer must ensure that the terms of the appointment of the independent party comply with the terms as may be specified by BNM.
 
Onward sale prohibited
 
A buyer16 is prohibited from undertaking an onward sale of any impaired loans/financing purchased from a seller.
 
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 24 June 2024. This document can be accessed here.
 
Comments
 
The provisions of the Policy Document are substantially similar to the provisions of the exposure draft issued by BNM on 19 June 2023, save for enhancements of several of the provisions.
 
The Policy Document sets out the requirements applicable to a disposal and purchase of impaired loans/financing that come within the ambit of the document. It also seeks to safeguard the interests of affected borrowers/customers and ensure that they are fairly treated by setting out in detail the requirements that a non-bank buyer is required to comply with in the management and administration of the impaired loans/financing purchased by a non-bank buyer. Similar requirements apply to buyers that are financial institutions under some of the policy documents, circulars and guidelines enumerated in paragraph 6.1 of the Policy Document.
 
Article by Sharifah Shafika Alsagoff (Partner) of the Islamic Finance Practice and Lee Ai Hsian (Partner) of the Banking and Finance Practice of Skrine.
 
 
 
1 A “non-bank buyer” is defined in paragraph 5.2 of the Policy Document as “a buyer that is not a banking institution, which includes a subsidiary of a banking institution or a special purpose vehicle established to purchase impaired loans/financing from the banking institution.”
2 The disposal and purchase of impaired loans/financing through other arrangements such as asset securitisation transactions or disposal and purchase of loans/ financing which are not impaired, will not fall within the scope of the policy document.  Where the disposal involves asset securitisation scheme, banking institutions are required to adhere to the requirements stipulated in the “Prudential Standards on Securitisation Transactions by Licensed Institutions” issued by BNM on 23 October 2009 and Guidelines on the Offering of Asset-Backed Debt Securities” issued by the Securities Commission Malaysia on 26 July 2004 or any other applicable regulatory requirements.
3 Paragraph 5.2 of the Policy Document, inter alia, defines “impaired loans”, “impaired financing” or “impaired loans/financing” as any loan or financing (excluding financing which is funded by an investment account) originating in Malaysia granted to borrowers/customers that falls within the classification set out in paragraph 10 of the Policy Document on Financial Reporting or the Policy Document on Financial Reporting for Islamic Banking Institutions, as the case may be.
4 The Policy Document states that a proposed disposal or purchase will be considered “material” if the nominal or book value of the impaired loans/financing exceeds RM 1 billion.
5 This refers to recovery efforts which are within the banking institution’s control, e.g. making calls, sending reminders and notices, serving of legal action, but excludes processes such as auction and foreclosures, and bankruptcy proceedings. Examples of 'reasonable efforts’ include the requirement for the seller to verify that they have the most recent contact details of the borrower/customer, or to ensure that any notices or reminders sent to the borrower/customer have actually been received by the intended recipient.
6 Projects of strategic importance includes financing granted for or related to national infrastructure projects (such as in the areas of transportation, telecommunications, energy, logistics and utilities) as well as those identified by the Government as strategic through its various developmental plans.
7 A “banking institution” is defined in paragraph 5.2 of the Policy Document as a licensed bank under the FSA, a licensed investment bank under the FSA or a licensed Islamic bank (excluding a licensed international Islamic bank) under the IFSA.
8 The Policy Document allows the buyer to enter into an arrangement with the seller of the impaired financing to leverage on the seller’s Shariah Committee.
9 Paragraph 10.4 of the Policy Document expressly refers only to “impaired financing”. Although it is not entirely clear, it is possible that the requirements in paragraph 10.4 only apply to a disposal and purchase of impaired financing granted in accordance with Shariah principles.
10 See paragraph 13.3(a) of the Policy Document.
11 See paragraph 13.3(b) of the Policy Document.
12 The Agensi Kaunseling dan Pengurusan Kredit (also known as the Credit Counselling and Debt Management Agency in English) is an agency established by BNM to provide various services, including assisting consumers to manage their debts to participating financial institutions by enrolling in a debt management programme under the auspices of the agency.
13 See paragraphs 13.1 and 13.2 of the Policy Document for further details.
14 The Policy Document provides that for financial products for which periodic statements are issued only upon request, the non-bank buyer must ensure that the borrower/customer has timely access to the information through other channels without cost.
15 Where a fee may be levied on the borrower/customer for information provided on a specific request, a non-bank buyer must inform the borrower/customer of the charges and the basis for such charges at the time the borrower/customer requests for the information.
16 As presently drafted, paragraph 13.44 of the Policy Document applies to buyers which are banking institutions and non-bank buyers.

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.

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