Bank Negara Malaysia (“BNM”) issued an Exposure Draft of the Policy Document for the Disposal and Purchase of Impaired Loans/ Financing (“Exposure Draft”) on 19 June 2023.
 
We highlight below some of the salient provisions of the Exposure Draft.
 
General
 
When issued, the policy document will apply to:

a)	Licensed banks under the Financial Services Act 2013 (“FSA”);
b)	Licensed investment banks under the FSA;
c)	Licensed Islamic banks (excluding licensed international Islamic bank) under the Islamic Financial Services Act 2013 (“IFSA”); and
d)	Non-bank buyers1 (severally a “non-bank buyer” and collectively “non-bank buyers”).

The policy document will come into effect on the day of its issuance and will supersede the following:

a)	Guidelines on Disposal/Purchase of Non-Performing Loans by Banking Institutions dated 29 June 2007; and
b)	Guidelines on the Disposal/Purchase of Non-Performing Financing by Islamic Banks dated 29 June 2007.

Application and procedures
 
The policy document that will ensue from the Exposure Draft 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 under Part D of the Exposure Draft 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 and section 112(4) of the IFSA.
 
Loans/financing eligibility criteria
 
Before submitting the joint application, the seller must ensure that the following criteria are satisfied:

a)	whichever of the following criteria 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

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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 the FSA or the IFSA:

a)	domestic banking institutions7 or locally incorporated foreign banking institutions in Malaysia; or
b)	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:

a)	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;
b)	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;
c)	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
d)	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 Exposure Draft. 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:

a)	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;
b)	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
c)	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 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 completion date where the buyer assumes the rights and titles to such impaired loans/financing (‘completion date’)]¹⁰.
 
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 to regularise or settle their outstanding loans/financing, before it enters into the transaction document / the completion date¹¹.
 
The seller must notify the affected borrowers in writing of the following within 7 calendar days of the completion date:

a)	the fact that the disposal is completed, including the name and contact number of the buyer; and
b)	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 buyer¹² or a written notification by the borrower¹³ that the borrower has fully settled the impaired loans/financing with the non-bank buyer, the seller must:

a)	update the status of the borrower to ‘Settled’ within 7 calendar days from the date the seller receives the request from the non-bank buyer or notification by the borrower; and
b)	notify the borrower within 7 calendar days from updating the borrower’s status in the CCRIS, that such status has been updated.

Buyer of impaired loans/financing
 
The buyer must, within 7 calendar days from the completion date, inform the affected borrowers in writing that:

a)	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
b)	if the affected borrowers are not satisfied with the decision of the buyer on the complaints or queries raised with the buyer under paragraph (a) above, the affected borrowers 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:

a)	for impaired loans/financing that are under the debt management programme (“DMP”) of the Agensi Kaunseling dan Pengurusan Kredit14 (“AKPK”), comply with the debt repayment plan and the terms and conditions set by AKPK; and
b)	for impaired loans/financing that are not yet under AKPK’s DMP:

•	allow borrowers that are facing financial distress to seek AKPK’s services;
•	negotiate and work out a debt repayment plan with AKPK for borrowers who have debts with multiple creditors; and
•	comply with the DMP and terms and conditions set by AKPK where the buyer and the borrowers 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 completion date.
 
A buyer that is a banking institution must:

a)	classify the purchased impaired loans/financing as impaired for financial reporting purposes;
b)	ensure that the total impairment provisions remain adequate to absorb any potential credit losses that may arise from these impaired loans/financing; and
c)	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, as the case may be.

Disposal of impaired loans/financing to entities within the same group
 
A seller and buyer of the same impaired loans/financing where such seller and buyer are banking institutions within the same group 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 13.45) of the Exposure Draft provides 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.¹⁵
 
Procedures on settlement of impaired loans/financing
 
Within 7 calendar days from the full settlement of an impaired loans/financing by a borrower, the non-bank buyer shall provide:

a)	documentary evidence to the borrower that the non-bank buyer has requested the seller to update the borrower’s status in the CCRIS; or
b)	the necessary documents to the borrower for the borrower to notify the seller to update the borrower’s status in the CCRIS.

Complaints handling
 
Detailed requirements are set out in paragraphs 13.4 to 13.12 of the Exposure Draft on various aspects of a non-bank buyer’s procedures for handling complaints by borrowers. 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 13.28 of the Exposure Draft. 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 and ensuring that information on the name and address of the borrower and amount owed are accurate and updated.
 
Paragraph 13.21 seeks to protect the privacy of the borrower 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 or harassing his family, relatives, neighbours, friends or employer, and prescribing the circumstances in which a debt collector may visit the workplace of the borrower.
 
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 or the employer of the borrower.
 
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 Exposure Draft. It is accountable to borrowers 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 by adopting the following disclosure principles – timeliness, clarity and conciseness, accuracy and relevance and highlighting important information. In addition, the Exposure Draft also sets out continuing requirements relating to the following:

a)	providing notice of change, including but not limited to the terms and conditions and the borrower’s rights and obligations;
b)	providing statements (including electronic statements) at regular intervals16 to the borrower without charge to communicate important information; and
c)	making disclosure following a specific request.17

Management of borrower’s information
 
Measures that a non-bank buyer is required to implement to preserve borrower’s information against theft, loss, misuse or unauthorised access, modification or disclosure by whatsoever means are set out in paragraphs 13.29 to 13.35 of the Exposure Draft. These measures include:

a)	deploying preventive and detective information and communication technology to prevent theft, loss, misuse or unauthorised access, modification or disclosure of borrower’s information and to detect errors and irregularities when they occur;
b)	assigning appropriate levels of access to borrower’s information to enable its staff to perform their jobs effectively without compromising the preservation of secrecy of borrower’s information;
c)	implementing adequate controls to ensure that borrower’s information stored either in paper and electronic forms are properly protected against theft, loss, misuse or unauthorised access, modification or disclosure;
d)	providing relevant training and issuing regular reminders to its staff who have access to borrower’s information on their obligations to handle borrower’s information with due care; and
e)	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 information and the consequences for failure to comply with such obligations.

Obligations relating to outsourced services
 
The Exposure Draft permits a non-bank buyer to outsource services and functions subject to the overriding condition that such arrangements do not create undue risks to the borrowers. A non-bank buyer is expected to maintain appropriate oversight over the outsourcing arrangement and ensure that the borrowers are not worse-off. Specific requirements on outsourcing are set out in paragraphs 13.36 to 13.43 of the Exposure Draft.
 
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 complies with the terms as may be specified by BNM.
 
Onward sale prohibited
 
A buyer¹⁸ is prohibited from undertaking an onward sale of any impaired loans/financing purchased from a seller.
 
Feedback to BNM
 
Feedback on the Exposure Draft is to be submitted to BNM by 19 July 2023.
 
Comments
 
The Exposure Draft 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 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 Exposure Draft.
 
 
Article by Sharifah Shafika Alsagoff (Partner) of the Islamic Finance Practice and Lee Ai Hsian (Partner) of the Banking and Finance Practice of Skrine.

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