Friday, 25 Nov 2005

A whopping RM23 billion — that is the estimated cost incurred by the government and banks in cleaning up the entire banking system in the aftermath of the 1997-1998 financial crisis.

Of this, the government's share of the losses is RM12.5 billion. The cost to banks is RM10 billion or more. And the sad part of the entire restructuring exercise is that the culprits responsible for the worst of the bad loans have not really been taken to task. At least, not yet.

In other countries, probably a few heads in both the public and private sectors would have rolled for causing the banking system to incur such huge losses. Here, heads have rolled in the private sector. Several corporate chieftains of well-connected companies were forced out. But it was not the end of their career, as some have resurfaced in other companies.

One banker, Datuk Ismail Zakaria, who was the chief executive officer of the now defunct Sime Bank, is facing criminal charges in court. Several other chief executives are also facing criminal charges. But considering that it has been more than seven years since the crisis, there are doubts anyone would eventually face the music.

Whether or not the authorities have taken action, the last of the agencies that was established to help sort out the mess in the banking system is finally closing shop.

After seven and a half years, the lights will go off at Pengurusan Danaharta Nasional Bhd on Dec 31. Danaharta was one of three agencies set up by the government to nurse the banking sector back to health and help corporates get back on their feet. The other two are Danamodal Nasional Bhd and Corporate Debt Restructuring Committee (CDRC).

All three had different roles but with a single objective — to resuscitate the banking system. Danamodal's role was to provide capital for banks in return for high-yielding papers. Most banks redeemed the papers early, except for RHB Bank, which is trying to redeem the papers but is not able to because of various complications.

The CDRC was to help restructure the debts of companies that were outside the purview of Danaharta. Some of them include the likes of UEM group and Johor Corp.

As for Danaharta, its role was to carve out non-performing loans (NPLs) from the banking system to enable banks to go about their job of lending. At its closure, the total amount of NPLs under the purview of Danaharta was RM47.7 billion and adjusted for accrued interest, this came up to RM52.4 billion.

The loans under Danaharta are classified under two categories. One is what it terms "acquired loans" or loans it purchased from banks at an average discount of about 55%. The other category is "managed loans" that Danaharta manages on behalf of Bank Negara Malaysia and the government. These loans were from Sime Bank and Bank Bumiputra Malaysia Bhd (BBMB). So, how did the loss of RM23 billion come about?

According to Datuk Zukri Samat, the managing director of Danaharta, the losses to the government in restructuring the banking system was about RM12.6 billion or less. This comprises RM11 billion that could not be recovered from the loans Sime Bank and BBMB were saddled with, RM1 billion for operating Danaharta (including its financing cost) and RM600 million from Danamodal (see table on banking restructuring cost to the government).

"The losses are probably less because the government did get some shares when they merged BBMB with Bank of Commerce. So, the cost at the end of the day is probably less than RM12.6 billion," he said in an interview last week.

Zukri also says the RM12.6 billion is about 3% of gross domestic product (GDP) and much lower than the earlier estimates of restructuring the banking system. When Malaysia was hit by the banking crisis in 1997, Bank Negara's estimate for restructuring the bad loans was about 5% of GDP. The International Monetary Fund had estimated the cost to be larger at 18% of GDP. Malaysia's GDP in 2004 was RM466.7 billion. The cost to the government may be low but if the cost incurred by the banks is included, the total cost will come up to about 5%, which is in line with the central bank's estimate.

The banking sector's cost of RM10 billion is based on the total NPLs of RM19.7 billion that were sold to Danaharta at a discount of 55%. The discount amounted to RM10.8 billion. After stripping out RM760.9 million in cash and RM66.5 million in securities that Danaharta had returned to banks as at Sept 30, 2005, the losses incurred by banks came close to RM10 billion.

Gan Kim Khoon, the executive director of AmResearch, agrees that the loss to the banking system is estimated at RM10.1 billion. "Yes you could say that," says Gan. One analyst says the losses incurred by the banks could be even more as not all the loans were sold to Danaharta.

"Some banks did not sell some of their loans and, subsequently, had to provide for these loans. For example, banks did not sell the loans related to textile manufacturer Hualon Corp (M) Sdn Bhd. Until now, banks are still providing for the exposure," says the analyst.

Another case is Northern Utilities Resources, the company that built a power plant to supply to the Kulim Hi-Tech Park. The exposure by four local banks to NUR was RM1 billion and it was provided for a year ago. Tenaga Nasional Bhd is in the process of buying the power plant and, if the deal happens, there will be write-backs.

Whatever the case, at the end of the day, Danaharta has residual assets of RM3.7 billion, which will be passed on to Prokhas Sdn Bhd, a company wholly owned by the government.

Role of Prokhas

Zukri stresses that Prokhas is not an extension of Danaharta, but merely an agent to convert all the residual assets to cash. "It is a collecting agent for Danaharta. It does not have the powers of Danaharta," says Zukri.

The residual assets are those that have already been restructured. The job left to Prokhas, Zukri explains, is to ensure the conversion of the assets to cash. "The residual assets have already been recovered. It is not that these assets need to be restructured Prokhas needs to concentrate on just converting the assets to cash," he says.

But sceptics want to know why the job can't be done by Danaharta itself? W hy is there a need to close down Danaharta and establish a new agency?

Zukri says that all agencies that had been established by the government have already closed down and Danaharta is following suit.

"The government already had a long debate on this and has decided to close it down. For Danaharta, Prokhas is merely a collecting agent. But the government may have other assignments for it," he says.

Prokhas will be headed by Fazlur Rahman Ebrahim, who was formerly with Danaharta handling the loans of BBMB. Before joining Danaharta, Fazlur was with BBMB. After Danaharta, he headed Bank Muamalat and is now with Bank Islam as its chief operating officer.

Fazlur is described as a "tough person" with creditors. Speculation is rife that he left Bank Muamalat after he could not see eye to eye with its owner Tan Sri Syed Mokhtar Al-Bukhary. At the time of writing, the government had not announced his appointment or the terms of reference for Prokhas.

But talk abounds that Prokhas may also handle the NPLs of development banks and Bank Islam. Two development banks — Bank Industri & Teknologi Malaysia and Bank Pembangunan & Infrastruktur Malaysia — were merged to form SME Bank. It is learnt that to give SME Bank a clean start, the NPLs from the merged entity may be handled by Prokhas.

As for Bank Islam, it recently reported losses of RM480 million for the financial year ended June 2005 due to huge provisions for bad loans to the tune of RM2.2 billion. The bank, which will see new investors from the Middle East and additional capital from a fund-raising exercise, has not come up with a decisive plan yet to handle the NPLs. But one of its options is to lump all the bad loans into a special purpose vehicle (SPV).

Whatever the case, if Prokhas is given additional assignments by the government, such as rehabilitating the loans of development banks and Bank Islam, many doubt that it would be able to achieve the same recovery rate as Danaharta.

This is because apart from the human element and strong backing from the government, one of the main ingredients for Danaharta's success is its "powers" to act to recover bad loans. But Danaharta's "powers" have put the agency in both good and bad light. W hile its supporters say that Danaharta could not have achieved the recovery rate of 58% without the powers, others say the powers could be abused.

Zukri says Danaharta's powers are no different from what has been accorded to other asset management companies in the region. "IBRA of Indonesia has more extensive powers than Danaharta. Even the RTCs (resolution trust companies) in the US have more powers," he says.

Recovery rate

On the whole, Danaharta's recovery rate is 58%. Its recovery rate of loans with Sime Bank and BBMB (managed loans) were higher than the loans it had acquired from the banks. "That's because we manage the Sime and BBMB loans lock, stock and barrel. As for the acquired loans, the banks will only sell us the loans that are difficult to recover," Zukri says.

Danaharta's recovery rate for the "managed loans" is 65% while the "acquired loans" recovery rate is 49%. But despite having a low recovery rate for the acquired loans, the mitigating factor for Danaharta is that the loans were acquired from banks at 55% discount in the first place (see chart on recovery rates as at Sept 30, 2005). "So even if the recovery rate for the acquired NPLs was 49%, Danaharta was able to go with the tide with minimum losses. If Danaharta had paid a lot for the loans in the first place, then the cost would have been heavy for the agency," says a banker.

But banks also gained in terms of having papers with high interest rates. Danaharta issued zero coupon bonds with a face value of RM11.1 billion to banks in return for the loans. The papers carried interest rates of between 5.2% and 7.2%. Also, banks were allowed to amortise their losses over five years.

"At the end of the day, there were gains and losses. The government suffered from having to take over BBMB and, indirectly, Sime Bank (through Bank Negara). Banks suffered when they sold the NPLs at discounts. But that is the price all had to pay," says the banker.

Last week, Danaharta chairman Datuk Zainal A Putih, during the agency's final press conference, said the final report would go down as a "collector's item" in corporate Malaysia. That is probably true.

Come Dec 31, Danaharta will go down in history as the agency that helped restructure the banking system. Since 1999, it has been in the limelight for good and bad reasons. Zukri in an interview with The Edge relates the trials and tribulations of Danaharta. An excerpt follows: