[Bernama] The collapse of the Malaysian Banking Sector

Malaysian banks crash and burn as the IMF watches on, issues of NPLs set to be addressed?


As the Asian Financial Crisis continues its rapid spread of contagion across the region, Malaysia's banking sector is showing signs of distress. The value of the ringgit has plummeted by over 20 percent since July 1997, and the Kuala Lumpur Stock Exchange (KLSE) index has fallen by over 13%. Billions in market capitalisation have been wiped out, while simultaneously eroding public confidence, resulting in nationwide protests. 

A potential reason for this collapse, perhaps, lies in the staggering rise of non-performing loans (NPLs). NPL ratios have skyrocketed from 2.97 percent in June 1997 to 18.23 percent in June 1998, with some estimates suggesting higher figures. As bankruptcy rises and retrenchment rates mount, banks nationwide are facing a sharp drop in borrowing and tight liquidity conditions, making it almost impossible to finance anything.

While the government did attempt to defend the ringgit, this severely drained foreign reserves, and policymakers were slow to acknowledge the need for action to address the crisis. A stress test by Bank Negara Malaysia has revealed that banking institutions require large injections of funds just to meet minimum capital adequacy requirements.




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