Malaysian experience in non-bank consolidation

Friday, 24 January 2014 06:53 - - {{hitsCtrl.values.hits}}

By Darshana Abayasingha Sharing ‘The Malaysian Experience’ on the consolidation of non-banking financial institutions, Gloria Goh, Partner of Ernst & Young Malaysia, recently remarked that strict due diligence is essential for companies during consolidation. She added that it was common practice that finance companies were not organised as well as banks and if problems weren’t addressed at early

stages with regard to non-performing portfolios and lending policy, serious problems could occur at a later stage. “It is key for parties to agree upfront on a fair and consistent basis of approach, so that the merged entity remains in good shape. Each institution has a different way of dealing. Their behaviour for vehicle hire purchase, equipment lending, the policy and procedure all has to be looked into carefully. We’ve seen financing of shares, and institution has their own way of dealing and deciding the quality of the lending. In Malaysia we had a situation where finance companies had different default procedure, collateral and evaluation to others. So all these difference has to be looked at. What types of agreements are in place? So due diligence is important on the methods of use,” Goh added. Delving further into the Malaysian example, Goh pointed to constant and open communication amongst the institutions and with the Central Bank as critical to maintain a smooth process. It is also imperative to allow acquisitions where possible. The Malaysian Government had made room for the necessary tax concessions to support this move and she encouraged local authorities to consider such where necessary.

“Did the Malaysian Government incur any cost for consolidation? No. however for the purpose of stability the Government had announced that the interests of depositors are guaranteed by the state. State backing and support must be seen to ensure the public and even financial institutions embrace the change,” she added. Malaysia consolidated its financial services sector in the late 1990s soon after the Asian financial crisis to strengthen the sector and arrest the increasing non-performing portfolio and prevent a slowdown in the economy. “Some institutions or arms may even have to be wound down to facilitate the merging process, or entail a change in strategy from retail to corporate. But the administrators need to sit them down and make them work together – if not, this process will take a very long time. What they need is a common ground and the administrators need to work together with the companies to achieve it.”