(Petaling Jaya, Friday): The statement yesterday by the Prime Minister, Datuk Seri Dr. Mahathir Mohamad about the Sime Bank and Bank Bumiputra which needs capital injection of RM1.2 billion and RM750 million resspectively had raised eyebrows, as he again blamed their problems on the devaluation of the ringgit and their share value.
Mahathir said: "They were very sound institutions before but when you knock off their financial strength, then naturally they will suffer".
By the Prime Ministerís logic, there is even no need for Bank Negara to play any supervisory role at all as these banks were "very sound institutions".
Malaysians must be aghast that the Prime Minister does not think there was anything amiss when Bank Bumiputra had to be rescued three times in 12 years - the first time in 1986 when Petronas had to pump in RM2.5 billion to bail it out of insolvency as the result of the RM2.5 billion Bumiputra Malaysia Finance (BMF) scandal and the second time in 1989, when Petronas pumped in another RM982 million after BBMB chalked up losses of RM1.06 billion that year largely due to a monumental provision of RM1.23 billion for non-performing loans. I welcome the statement by deputy governor of Bank Negara, Datuk Fong Weng Phak, rebutting talk among analysts and foreign observers that the four institutions which needed or may need capital injections, namely Sime Bank Bhd., Bank Bumiputra Malaysia Bhd., Abrar Finance Bhd and Chempaka Finance Bhd. represented "only the tip of the iceberg" and that more institutions would follow in the coming weeks with news of recaplitalisation.
Fong said: "What we disclosed is not the tip of the iceberg but the iceberg itself".
The Bank Negara governor and deputy governor should realise that they would be held fully to this assurance that what they have disclosed is not the "tip of the iceberg but the iceberg itself" as far as the banking crisis in Malaysia is concerned and they would be held fully answerable should this prove to be otherwise.
I also welcome the greater preparedness of Bank Negara governor and deputy governor to be more open, accountable and transparent, which is important to restoring confidence.
In line with such openness, accountability and transparency, Bank Negara should respond to the comments of Fitch IBCA, the international rating agency, when on Wednesday it lowered the individual rating of Sime Bank to D/E from C and affirmed the bank's legal rating of 2.
This is the press release of Fitch IBCA when announcing the rating downgrade of Sime Bank after the announcement that it faces a net loss of RM1.8 billion for the six months ended December 1997:
"Fitch IBCA is of the opinion that Sime Bank's problems arose from a combination of rapid loan growth and imprudent lending. In January 1997, most of it coming from Sime Darby. In the second half of 1997 and in spite of the currency crisis, the bank grew its loans by 29%. The agency said that it is interesting that about 60% of loans for the second half of 1997 were at overseas branches and Sime International and that of these loans, 40% were to the real estate sector and 22% were for share financing.
"The agency indicated that it was puzzling that Bank Negara allowed Sime Bank to increase its exposure to share financing when the bank was already in breach of the Bank's Negara's limit of 15%. As of December 1997, Sime Bank's exposure to share financing was 22% of loans.
"To fund the loan growth, the bank became increasingly reliant on the interbank market, with its loan to deposits ratio rising to 134% at the end of December 1997 from about 80% in January 1996, significantly reducing liquidity.
"Another odd characteristic of Sime Bank's loan book is the large proportion of loans for consumption credit, which increased ten-fold from MYR 392 mln at the end of December 1996 to MYR 3.7 bln at the end of June 1997, an increase of MYR 3.3 bln or 20% of total loans.
"Sime Bank did not disclose the exact breakdown of its consumption credit loans but indicated to Fitch IBCA that some were stock market related.
"Malaysian banks typically classify credit card and personal loans as consumption credit and these loans formed just 2.8% of banking system loans in June 1997. In contrast Sime Bank's consumption credit formed 21% of group loans, 7.5 times the industry average. "The bank's chief executive, Datuk Ismail Zakaria, who was the architect of the bank's policy in increasing its consumption credit resigned suddenly in January 1998.
"Sime Bank indicated that its non-performing loans were 18% of total loans at the end of December 1997, if classified as non-performing when overdue in by three months. This compares with nonperforming loans of 6% in June 1997.
"A deterioration in the bank's loan quality was expected, but the extent and rapidity has been extraordinary, raising questions as to the reliability of Malaysian banks' financial data.
"Fitch IBCA warned that it is now extremely important for the Bank Negara to require Malaysian banks to provide full and timely public disclosure of their financial condition. The Asian region has been severely affected by a crisis of confidence which has devastated the Indonesian and Korean banking systems.
"Bank Negara's announcement of Sime Bank's poor financial condition was an unwelcome surprise, which severely affected both investors' and depositors' confidence in the entire financial system.
"The agency indicated that one of Bank Negara's greatest failings was to exempt Malaysian banks from fully complying with BNM/GP8, a Malaysian Banking Regulation specifying the format of banks' financial statements. Since being implemented in 1994, Malaysian banks have been exempted from disclosing schedules showing changes in non-performing loans and provisions as well as the distribution of their loan book.
"The agency said that the problems for the Malaysian banking sector are just beginning. Although the country's banks do not have the same structural problems that have plagued the Indonesian, Korean and Thai banks, interest rates have risen to an extremely high level and the highly leveraged Malaysian corporate sector is expected to have some difficulty over the next year.
"The government recently used a powerful monetary tool, a reduction in the Statutory Reserve Requirement, to reduce the pressure of interest rates but its effectiveness is still uncertain.
"The anticipated sharp decline in the real estate market is expected to put further pressure on asset quality towards the end of 1998.
"The agency expects Malaysian banks' asset quality to further deteriorate in 1998 as the full effects of the depreciation of the ringgit, the stock market decline and the rise in interest rates are felt."
Bank Negara should respond to the various criticisms and comments made by Fitch IBCA.
The Prime Minister has again been making speeches and statements raising eyebrows all round.
Yesterday, for instance, he spoke of "the light at the end of the tunnel" and that Malaysia "is on the path to economic recovery, as the ringgit has appreciated a bit against major currencies and local share prices have risen".
In actual fact, the KLSE benchmark Composite Index fell by 27.09 points to 705.94 on Wednesday and by another 9.15 points to 696.79 yesterday, and it was down another 5.03 points at 691.76 at 12.15 p.m. today. These are also worrying days for the Malaysian ringgit, returning to the low level of 3.9300 against the US dollar yesterday, crashing below the RM4=US$1 level at 10.15 a.m. this morning.