 Detecting Non-Performing Loans:

Non-performing loans (NPLs) do not happen overnight. There are usually signs indicating the
Deterioration in the credit quality of a loan. Groves classifies the signs of NPL into five
Categories, i.e.:
1. Signs from financial statements
2. Signs from borrowers conduct of loan or conduct of account
3. Signs from borrowers business
4. Signs from borrowers behavior
5. Signs from the macro economy.

 Prevention of Non-Performing Loans in Malaysia:

Upon detection of any troubled loan account in a bank, the bank should take the necessary
Measures to prevent the account from turning into an NPL account.
Bank Negara Malaysia (BNM) feels that the effort to prevent NPL has to begin by resolving
the corporate failure problems. That means seeing and understanding the problems through
the borrower’s eyes.
Mors man believes that a credit officer should have the following strengths in order to protect
his loan portfolio from NPL problem:

1. Competence in corporate analysis:Which include

(I) Character, capacity and depth of management,(ii) The company’s standing in the industry
and market,(iii) Business environment and business climate,(iv) Financial statement analysis

2.Ability to evaluate loan applications

(i) Purpose of loan,(ii) Loan repayment,(iii) Secondary source of loan repayment,(iv) Monitoring
needs,(v) Compliance with loan policy.

3.Possession of at least minimum knowledge and experience

(i) Academic qualification,(ii) Technical skills,(iii) Knowledge of bank value
4.Interpersonal relationship skills
(i) Communication skills,(ii) Interview skills,(iii) Listening skills,(iv) Skills in delivering bad
news,(v) Sales and marketing skills,(vi) Time management skills.

5. Desirable character traits

(i) Courageous,(ii) Considerate,(iii) Consistent

 Sale of Non-Performing Loans by Malaysian banks:

Banking institutions are permitted to sell their NPLs to non-banking institutions provided that
the sale of NPLs is made in accordance with the requirements of the Guidelines on the
Disposal/Purchase of Non-Performing Loans by Banking Institutions which are issued under the
Banking and Financial Institutions Act 1989.
The Guidelines sets out certain requirements that must be met by any banking institution
proposing to sell NPLs:
1. Banks can only sell to locally incorporated companies which the purchaser is majority
owned by domestic shareholders as the purchaser is subject to a foreign equity cap of
49%.
2. Banks are also required to undertake necessary measures to inform the borrower to the
sale of the NPLs;
3. Sale of NPLs that is made in accordance with requirements of the Guidelines do not
Contravene the BAFIA.
4. Sale of NPL does not affect any debt restructuring agreements.
The amount of NPLs sold in the news report is grossly overstated. Since 2005, NPLs sold by
banks is less than RM 3.0 billion