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FINANCIAL LAW - Banking Law

Related Topics : Banking Law . Offshore Banking Law . Broker Disputes . Commodities Law . Investment Terms . Raising Capital . Securities Law . Buying On Hire Purchase . Exchange Control Rules . Danaharta Act

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THE BANKING AND FINANCIAL INSTITUTIONS ACT, 1989

Offenses

The Fourth Schedule of BAFIA lists down the penalties for the various offenses and non-compliance with BAFIA. The maximum penalty is a fine of RM10 million and a maximum imprisonment of a term of 10 years. The Governor of the Central Bank is authorized to compound any offense committed an impose a fine not exceeding fifty per cent of the maximum fine provided under BAFIA for that offense. In cases of offenses for which no penalty is listed in the Fourth Schedule, the fine shall be an amount not exceeding RM500,000 and in the case of a continuing offense an additional dally fine of RM1,000.

Section 105 provides that any person who with an intent to deceit, inter alia, makes a false entry, omits to make, alters, conceals or destroys an entry in any book or record of the licensed institution shall be guilty of an offense.

Section 106 provides that any person who at the time of commission of any offense was in any manner or to any extent responsible for the management or was assisting in the management of the licensed institution shall be guilty of the offense unless he proves that the offense was committed without his consent or connivance and that he exercised all such diligence to prevent the commission of the offense having regard to the nature of his functions in that capacity and to all the circumstances.

Section 110 provides that all offenses listed in the Fourth Schedule shall be seizable offenses, and a police officer not below the rank of Inspector, or an investigating officer under section 82(1) may arrest without warrant any person whom he reasonably suspects to have committed or to be committing any such offense.

Section 115 strictly prohibits any officer, director or agent of a licensed institution to accept or agree to accept either for himself or for another anything of value or token from any person applying for any credit facility or in relation to any other business of the licensed institution from any person other than from such licensed institution.

Issue of Directives & Regulations

Section 116 empowers the Central Bank, with the approval of the Minister, to make such regulation as may be necessary to gibing full effect to or better implementation of the provisions of BAFIA

Section 126 provides that the Central Bank or the Minister may generally in respect of BAFIA or in respect of any particular provision of BAFIA or generally in respect of the conduct of all or any of the licensed or scheduled business, issue such guidelines, circulars, or notes as the Central Bank or the minister may consider desirable

The Central Bank has under section 126 issued the guidelines on the suspension of interest on non-performing loans and provision for bad and doubtful debts.

Garispanduan 3

The Central Bank issued the 'Guideline on the Suspension of Interest on Non-Performing Loans and Provision for Bad & Doubtful Debts' on November 1st, 1985. These guidelines were revised on December 26th, 1989. A summary of the guidelines is as follows

Classification of Loans as Non-Performing

All term loans, revolving loans, leasing loans, block discounting facilities, hire-purchase loans and other loans shall be classified as non-performing when the principal or interest have been in arrears for 6 months or more.

Bankers acceptances, trust receipts, bills of exchange and other instruments of similar nature are treated as non-performing when the instrument has been in arrears after maturity date.

In case of rescheduled credit facilities

where rescheduling occurs before an account is classified as non-performing, the rescheduled account shall be classified as non-performing when, in the aggregate, the period of time the account is in arrears before rescheduling (if any) and after rescheduling is 6 months or more
where rescheduling occurs after an account has been classified as non-performing, the rescheduled account shall continue to be reclassified as non-performing.

Suspension of Interest on Non-Performing Loans

All interest accrued (but uncollected) from the date an account is classified as non-performing shall forthwith be suspended and credited to the "Interest in Suspense" account. This interest shall only be recognized as income as and when it is collected in cash by the financial institution

The payment of interest should be account for on a FIFO basis in the following order

interest income recognized (but uncollected) prior to classification of the loan as non-performing
interest suspended ; and
penalty interest

Reclassification of NPLs as Performing

A NPL may be reclassified as performing upon full settlement of all arrears in interest or principal. However, the funds for repayment of the arrears should not be obtained from the creation of any new loan from the same financial institution.

In the case of a NPL which was subsequently rescheduled, the account shall be classified as performing only when the repayment under the rescheduled term have been complied with for a continuos period of 12 months.

Provision for Bad & Doubtful Debts

All financial institutions must maintain a general provision account of at least 1% of total outstanding loans (including accrued interest), net of interest-in-suspense and specific provision for bad and doubtful debts.

Specific provision is required to be made on the shortfall in security value over the amount outstanding (net of unearned interest and interest suspended) for accounts which are classified as sub-standard, doubtful or bad.

Substandard accounts are those which involve more than a normal risk of loss due to certain adverse factors such as sporadic delays in debt-servicing, unfavorable financial conditions, etc.

Doubtful account are those where the collection in full is improbable and there is a high risk of ultimate default.

Bad account are those deemed uncollectable and worthless

Guidelines are also issued for determining the classification above and for valuation of securities held. However, these guidelines are subjective and each case had to be looked at individually.

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