http://www.asiaweek.com/asiaweek/
daily/foc/0,8773,170510,00.html

Webfiles: Make 'em pay!

Malaysian borrowers and lenders must be held responsible

BY ASSIF SHAMEEN

Wednesday, August 8, 2001
Web posted at 11:50 a.m. Hong Kong time, 11:50 p.m. GMT

Not for nothing is Malaysia's Dr. Mahathir Mohamad my favorite politician. Though I disagree with him a lot I must admit that I do admire his guts to call spade a spade, and more. Mahathir has a penchant for speaking his mind with utter disregard of the consequences. His former finance czar Daim Zainuddin once told me, in jest, that overseas business confidence in Malaysia would dramatically improve if Mahathir was little more cautious or if foreign journalists didn't splash overseas every word that Mahathir uttered merely for domestic consumption.

Take his latest statement on Malaysian banks. Mind you, these days Dr. Mahathir wears a lot of hats. He is not only Malaysia's Prime Minister, he is also the Finance Minister. Malaysian banks must forgive some of the loans they have given out to distressed companies, he said the other day. That's right. "When things have gone sour, they have to take a haircut," Mahathir told reporters. "Banks take risks when they lend. They must accept that when they lend, they run the risk. Banks can't just say "we'll lend you so much money, the interest is so much, now pay the whole lot."

Malaysian banks wrote off over $10 billion worth of bad loans in the aftermath of 1997-98 recession. More bad loans were acquired from the banks by Danaharta, a government financial restructuring agency. But another $9 billion worth of overdue corporate debt remains on the books of the banks. A lot of that is owed by politically well-connected companies. As the economy turns down following sluggish demand for Malaysian exports overseas, non-performing loans (NPLs) in the Malaysian banking system are rising. Malaysia's NPLs are now 7.8% of total loans, compared to 7.4% in April. NPLs have been rising for the last seven months.

But the 7.8% figure doesn't tell the whole story. For one thing, Malaysia's definition of "non-performing loan" is different from other Asian countries'. In mid-1998, Malaysia changed its definition of a non-performing loan to be one on which no interest or principal payment had been made for six months. In most countries, if a loan hasn't been serviced for 90 days it is normally classified as an NPL. Moreover, not all loans that haven't been serviced for six months are classified as non-performing. Those that are being "worked out," either under the auspices of state-controlled corporate debt restructuring agencies or under committees of creditor banks, are sometimes not counted. Indebted corporate groups like Renong, TRI, Lion, Land & General and others, between them, owe banks billions of dollars. None of these loans are classified as non-performing, though a lot of them haven't been serviced for more than six months.

Not surprisingly, Malaysian banks stocks took a bit of a beating after Mahathir spoke. Moody's Investors Service, in a note to clients, said it wasn't changing its view on Malaysian banks despite Mahathir's statement because it had warned for years now about the "potential for additional losses coming from large Malaysian corporate borrowers [who have] proved troublesome for banks." Moody's said the "forbearance has meant that some of the largest loans in the system, though impaired, are not reported as delinquent."

But really, a bigger problem here is what corporate governance gurus call "moral hazard." If I know that someone someday will forgive my loan, why do I even try paying it back? The reason why some of the politically well-connected companies in Malaysia kept on borrowing, knowing fully well that they neither had the cash flow nor the business model to generate enough revenues needed to repay the banks, is because some of them knew deep down that they really would never have to repay. Frankly, it should never come to that. Banks around the world take "haircuts" all the time but debtors take hits too, and don't just walk away scot free.

Let me say I am not against debt forgiveness in extreme cases. Indeed, for instance, I am all in favor of debt forgiveness for extremely poor countries, especially in sub-Saharan Africa who until recently have had to set aside a huge portion of their total budget to repay earlier foreign debts. In cases like that, debt forgiveness is the only option. But should there be debt forgiveness for fast-growing companies in relatively prosperous countries like Malaysia, particularly those that are led by CEOs who have their own luxury private jets? That's where I would draw the line. If debt forgiveness was made mandatory, as Mahathir suggests, I pity those who own shares in Malaysian banks. More bad loans, more write-offs, more debt forgiveness means more losses and low share prices of banks. Should shareholders of Malaysian banks pay for debt forgiveness?

That brings me to another interesting debate. If we are going to start forgiving bad loans, should we be so forgiving of the bank executives who made them? I believe someone has to be accountable for something. It just ain't fair to forgive and forget everything.