Nonperforming Loans and Purchase of Loans by Public Asset Management Companies in Malaysia and Thailand

• Author: Masahiro Inoguchi
• Published date: 01 December 2016
• Date: 01 December 2016
• DOI: http://doi.org/10.1111/1468-0106.12197

NONPERFORMING LOANS AND PURCHASE OF LOANS

BY PUBLIC ASSET MANAGEMENT COMPANIES IN

MALAYSIA AND THAILAND

MASAHIRO INOGUCHI*Ritsumeikan University

Abstract. This paper exploresthe factors which eliminatedthe nonperforming loan (NPL)problem in

Malaysiaand Thailand following the 1997Asian financial crisis. The numberof NPL, which expanded

in the aftermathof the crisis, has sincedeclined in most South-EastAsian countries. Althoughprevious

studieshave explored the causesof the increase in NPL numbers, fewhave analysed the factors thatcon-

tributed to the reduction in their number in Asia. In Malaysia and Thailand, authorities put in place

several measures to manage NPL. As a vehicle to acquire NPLfrom banks, Malaysia establishedthe

Pengurusan Danaharta Nasional Berhad (Danaharta) in 1998, while Thailand established the Thai

Asset Management Corporation (TAMC) in 2001. We analyse whether the characteristic features of

banks, improvements in macroeconomic conditions,and facilities for purchasingloans caused a reduc-

tion in the numberof NPL in Malaysia and Thailand. The resultssuggest that selling loans toa public

assetmanagement companywas effective in reducingthe number of NPLin Thailand. While macroeco-

nomic conditionsinfluenced the decline in NPL ratiosin Thailand, in Malaysia, wellperforming com-

mercial banks and large commercial and investment banks generally had smaller NPL ratios

throughoutand following the crisis.

1. INTRODUCTION

Since the 1997 Asian financial crisis, governmental authorities throughout

South-East Asia have continued to pursue reform of their banking systems. In

South-East Asia, a sound banking system is particularly important, because a

significant number of companies rely heavily on bank loans for financing.

Nonperforming loans (NPL), in particular, can become a major problem for a

banking system, as evidenced by recent experiences around the world. One

example is the substantial losses throughout the US banking sector which

resulted from the decline in housing prices in the USA, itself fuelled by the large

number of subprime mortgages and NPL. The collapse of land prices in Japan in

the 1990s, which escalated the number of NPL via real estate collateral loans

and provoked a banking system crisis, is another. Some South-East Asian coun-

tries have experienced similar problems, notably after the 1997 Asian financial

crisis, when the massive increase in NPL wreaked havoc on the region’s banking

system.1Consequently, some banks faced bankruptcy, and the number of bank

loans declined, causing macroeconomic conditions to worsen significantly.

*Address for Correspondence: Ritsumeikan University, 2-150, Iwakura-cho, Ibaraki-shi, Osaka

567-8570, Japan. E-mail: inoguchi@fc.ritsumei.ac.jp. The author gratefully acknowledges helpful

comments and suggestions by Jenny Corbett, John Tang, Timo Henckel, Shigeyuki Abe, Fumiharu

Mieno, Daiji Kawaguchi, Hiroshi Gunji, Junji Yano, an anonymous referee, seminar participants at

Doshisha University, Hitotsubashi University and the Australian National University, and delegates

at the meeting of the Japan Society of Monetary Economics. All errors in this paper are solely mine.

This research was supported in part by JSPS KAKENHI Grant No. 21730267.

1Ito (1999) notes that real estate prices increased when the economy expanded in the 1990s before

the 1997 Asian crisis.

Pacific Economic Review, 21: 5 (2016) pp. 603–631

doi: 10.1111/1468-0106.12197

© 2016 John Wiley & Sons Australia, Ltd

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The governments of the Asian countries affected by the 1997 crisis have sought

to rebuild their banking systems by restructuring and consolidating domestic

banks. In addition, government authorities attempted to eliminate NPL by pur-

chasing them from banks.2These measures may have had contributed to the re-

duction in number of NPL.3Since 1999, macroeconomic conditions have

improved, and NPL have gradually declined in most South-East Asian countries.

This paper explores whether the characteristic features of banks, the purchase of

loans by NPL management facilities and improvements in macroeconomic con-

ditions caused the reduction in NPL in both Malaysia and Thailand.

It is important to discuss the policies that eliminated NPL in South-East Asia

because this problem may also arise in other emerging economies. Although

many studies have highlighted how NPL increased in the first instance and have

discussed solutions to the problem, few have analysed why NPL declined in Asia

and, in particular, the factors that contributed to the reduction of NPL in South-

East Asian countries. In Japan, Hosono (2010) has investigated factors which

caused NPL to decrease. Hosono looked at factors that increased the number

of NPL as explanatory variables in the regression, and showed that land prices

were an important contributing factor in the decline of NPL. In other work,

Boudriga et al. (2009) used aggregate banking, financial, economic and legal

environment data from a panel of 59 countries over the period 2002–2006 and

empirically analysed the cross-country determinants of nonperforming loans.

This study suggested that higher capital adequacy ratios and prudent provi-

sioning policies appeared to reduce the level of problem loans.4

Previous studies have discussed the incidence of and solutions for NPL and

some studies have described the processes of and factors influencing the NPL

problem in Asia. For example, Ueda (2000) analyse the causes of NPL in

Japanese banks in the 1990s, including the role of real estate-related loans, the in-

fluence of financial liberalisation, inefficient bank management, and moral haz-

ards relating to certain safety nets. Hu et al. (2004) examine the influence of

deregulation on the NPL of a panel of Taiwanese commercial banks during the

period 1996–1999, identifying a relationship between the number of NPL and

the total loan amount (hereafter, the NPL ratio) and government shareholdings.

This study concluded that as the percentage of government shareholdings in a

bank increased, the NPL rate initially fell and then increased thereafter. More-

over, they found a negative correlation between bank size and the NPL ratio.5

2Fung et al. (2004) compare government-established and government-owned asset management

companies in East Asia from the late 1990s. They argue that these asset management companies have

many common characteristics. Bonin and Huang (2001) discuss the importance of the establishment

of asset management companies in China.

3Although selling NPL should reduce the amount of NPL in each bank, NPL could increase when

banks subsequently increase loans to less creditworthy companies.

4Hasan and Wall (2004) analyse the determining factors in loan loss reserves in the USA, Canada

and Japan. Also in the USA, Berger and DeYoung (1997) analytically explored the relationships

between loan quality, cost efficiency and bank capital. They suggested that cost efficiency was an

important indicator of future problem loans and banks.

5Sinkey and Greenawalt (1991) analyse the loan–loss factor and suggest that banks with adequate

capital tend to have lower loss rates.

M. INOGUCHI604

© 2016 John Wiley & Sons Australia, Ltd