God Father correctly posed question, “How else could the banks make up for the losses they incur from their non-performing loans particularly those that they give to their friends and cronies ?”

You must ask who are ultimately the substantial or majority shareholders of banks – government, quasi government institutions, agencies, GLCs, political parties ?

Merger of banks is often an excuse to cover up losses of the weak bank merged with the better one.

Though I won’t say all, but many many banks have poor credit culture. They lend to family members and friends of politicians and those with titles (Datukship, Tan Sri ship etc) who think it is their privilege to borrow as much as possible to finance government contracts awarded to them due to political connections. The motto is to make hay whilst sunshine. These are the people who like to make easy money but don’t like to meet debt obligations.

The many bank officers and even some of top management are susceptible to entertainment and bribes to endorse loan proposal.

If one collaborates with an influential bank officer to borrow for example 30 million without adequate security and with no intention to pay back, one can share the spoils with the bank officer. For the bank officer, losing the bank’s money is bad credit judgment, not theft. The worst fate he suffers is to get sacked.

DarkHorse,

Perhaps you’re not back in Malaysia a long time. RM 30 million bilateral loan or more to limited companies is not uncommon. (I have also known characters who have their proxies in 3 or 4 different companies borrowing in aggregate up to RM70 million).

In case of GLCs borrowing RM500 million or even a RM1billion (without it being a syndicated loan or even a club deal), lent clean, has happened).

It depends on size of the bank, risk appetite, corruptibility of officers right to the top, and who borrows which does not entirely depend on textbook objective credit criteria but also subjective factors.

To DarkHorse

Things have really changed much since 10 years ago.

Nowadays there are bank mergers towards 5 mega anchor banks. For instance, Mayban Finance is now no more, absorbed into Maybank. 20 years ago we had Bank of Commerce (BOC) (ulitimately owned by UMNO’s fleet Group). It swallowed the failed United Asian Bank, then Bank Bumiputra Bhd (& its Merchant Bank & Labuan Offshore unit) and last year, took over Southern Bank (which itself earlier swallowed United Merchant Bank Bhd) and merged with CIMB Merchant Bank to form the present mega conglomerate CIMB Bank Bhd helmed by Datuk Nasir, brother of DPM Najib.

So some of these mega banks have everything integrated, retail, corporate & international banking, corporate finance merchant banking, offshore banking etc. They have huge capital base/single customer limit because of these mergers. It depends on risk appetite. They still participate in syndication (as in RM300 million loans) for certain cases (sharing risks sharing income), and for others they whack everything. You know, more than 10 years ago, Offshore banking in Labuan was just fledging. Now’s different. These banks are offshoot of very big banks from overseas. Though Offshore banking Act prevents them from lending in Ringgit, they can still do RM 30 million through backdoor issuance of bank guarantee, performance bond SBLCs etc to correspondent bank (RM funder).

If you should meet Malaysian ex bank cum migrant, ask them about the ways they make enough to ‘temporally retire’ and apply for PR overseas.

“I should be calling my travel agent and book the first flight back!”

Maybe you should. Here can make big money because many on the take. This in some cases include top management of banks.

It’s beyond space here to explain in detail how to go around credit/security parameters. Enough to mention that nowadays we have friendly valuers to overvalue market price of properties mortgaged. We have security like specific mortgage of certain raw materials to be purchased. Borrower can create other companies through proxies to invoice inflated prices. Consignment of these raw materials can in series be mortgaged either by way of specific debentures, assignment or specific mortgages to different banks as “security” but by their very nature they are not divisible to naked eye on inspection. Same property may be collaterised several times by double triple and quadrupled financing. Even listed shares which one pledges as security. You get a market operator to play up price before giving security. When price collapses like deck of card, bank cannot recover.

I am simplifying here for illustration. Bank officers supposed to check counter and fundamentals of companies whose shares are pledged. Eventually there is some accountability depending on the bank since banks have internal and external auditors and in terms of credit, check and balance. But the officer recommending loan and collaborating with both customer and the superior ‘close one eye’ bank executive who is supposed to exercise oversight, will have since resigned by the time the credit goes into default or even emigrated.

If even PM has no time to oversight deputy minister of his portfolio, do you think Bank’s executive got time to exercise oversight function?

In Malaysia, it’s also who you know. Think they won’t close one eye and lend big to family members or cronies of top leaders like what Godfather earlier said? How else can you explain why despite making a lot of money, many banks failed here, have their balance sheet wiped out, need merger to camouflage bail out?

Forgot to mention in above case, Borrower co. A was also required to pledge its unlisted shares/equity in co. C (that owns RM25 million marketable listed shares) to the bank.

So everything looks good on paper. Bank has control of Borrower Co A by taking a pledge of all its shares. Bank has control over subsidiary co. C by taking as pledge all of Co. A’s shares og Co. C as security. On top of that Co. A also provided debenture with power of attorney and right to appoint receiver.

But notihing is done until defualt by which time it is too late.

Being chargee of shares in Co. C is no use if the bank neglects to appoint its officers as directors of co. C and control its board’s decision and accounts. These proxy directors just fritter away the RM25 million assets in form of listed shares for the “brains” who has lready got another RM10 million from the bank through borrowing of co. A.

There is no School of Fraud here. :) People here study the law not only to comply but also often to circumvent (not commit fraud) without breaking it. You can say that the line is hard to draw. It is. Still many would try skate on thin edge between fraud and taking advantage of imperfection in the system. The whole political, cultural, corporate and business milieu is a school for how to ‘beat the system’ without infringing criminal law.

What encourages this tendency?

Profound change has taken place in the business landscape since over 10 or 15 years ago.

Aspiring to be modern in the catch up game with the developed West, the country has adopted many laws, regulations and rules on best practices from the West. They include laws and rules on corporate governance, against conflict of interest, for transparency. However, the habits of mind and practice, in politics and business, remain for many, feudal and patronage based. The line crossing over to corruption is easy to cross.

To reconcile the pretension to be ‘developed’ conforming to best practices of fair play and the innate tendency to gain unfair advantage arising from “feudal” mindset and practices, many would try to thread on that thin edge between beating the system and committing a crime. Many of us do so often that it has become our forte.

In this rather perverted sense, Malaysia is an interesting place to do business and make money.