Better ways to handle bad debt

Tuesday September 23, 2008

Malaysia reacted quickly during the 1997 financial crisis and avoided an otherwise costly bad-debt plan

IT is no use crying over spilt milk. But the US could have averted an extremely costly bad debt plan, otherwise referred to as “toxic assets dumpster,’’ by taking quick pre-emptive measures.

Not that Malaysia wants to blow its trumpet, but it bit the bullet very fast during the 1997 Asian financial crisis.

“We knew it (the contagion) was coming here," said Datuk Seri Hamidy Hafiz, CEO of Affin Bank Bhd. Once a stern decision was taken, a thorough investigation of banking assets and loans in Malaysia was conducted.

“Action must be taken when (the problem) is first detected. And it cannot be done via instalments," said Hamidy, former managing director of Pengurusan Danaharta Bhd, the asset management company formed to take over and restructure bank debts at that time.

Broadly, the basic steps had involved:

* Stress testing to see how the banks would withstand any stock or property market meltdown;

* Every bank providing a list of accounts to Danaharta for analysis;

* Danaharta offering to buy over the assets at market value, and banks having to take a haircut;

* In cases of insufficient capital, Danamodal Nasional Bhd came in to inject capital and take up a stake in the bank;

* If the loan exceeds the amount of security available, the bank will be paid in government bonds and given five years to amortise the outstanding amount.

“We put the discipline into the banks," said Hamidy.

“Danaharta organised the disposals in an orderly manner without impacting the markets and there was no element of public subsidy."

Nevertheless, the world banking community heaved a sigh of relief when the US decided to embark on an estimated US$700bil to deal with the mortgage and non-mortgage-related debts of large institutions caught in the subprime tailspin.

Just that if it had made the decision earlier, it might have only involved housing loans. Not only are the costs escalating, the price to pay for erosion in confidence is getting higher. Having occupied pole position in the world for so long, US banks would probably find it hard now to raise credit lines overseas.

Prior to its set-up, Danaharta had studied various debt plans such as Securum (Sweden, 1992) and FOBAPROA (Mexico, 1995).

Based on the restructuring model, Securum had successfully managed and sold mostly real estate assets within a relatively short time.

However, the transfer of loans by FOBAPROA did not succeed as capital deficiency was said to be underestimated.

FOBAPROA was set up based on the rapid disposal model whereby banks were cleaned up and assets sold or recovered as quickly as possible.

The US Resolution Trust Corp, which succeeded in resolving 747 thrifts with assets of US$465bil, was also based on the rapid disposal model. The danger with rapid disposal is that assets are sold or recovered so quickly that it can “crash" the market.

In Danaharta’s case, the asset management model entailed rehabilitation of assets and loans that could be saved, and selling off the balance.

As it stands, the world market is still awaiting details of the massive US bailout plan and how its debts are going to be sold off or restructured.

The method used will be important for people to gauge the orderliness and lasting impact to markets worldwide.


http://thestar.com.my/news/story.asp?file=/2008/9/23/business/2093962&sec=business