Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on September 30, 2019 - October 6, 2019

FOR over a year now, Bank Pembangunan Malaysia Bhd (BPMB) has grabbed the headlines for all the wrong reasons. Reports of dubious loans, including to politically connected parties, revealed glaring weaknesses in its governance and lending practices.

Fresh from a complete board revamp and the appointment of a new president-cum-group CEO — Arshad Mohamed Ismail — in April, the country’s oldest development financial institution (DFI) is eager to start anew.

In an interview with The Edge, Arshad says BPMB took a critical look at how it operates and has come up with a three-year strategic plan (2020-2022) to move forward and evolve as a DFI. More importantly, it has taken steps to enhance governance and internal processes to ensure past mistakes are not repeated.

“We acknowledge that governance is very important, and that’s why that was one of the first things I focused on after joining BPMB,” Arshad says in his first interview since taking the helm six months ago.

Earnest and eloquent, he shares that by end-2022, BPMB wants to evolve into a policy bank, meaning, it will not only be a financier but also an adviser to the government in terms of strategic areas the country should focus on.

“That is the main end-game for us, and in order to do that, we definitely need to enhance our internal capabilities,” he says.

When pressed about what went wrong at the bank, Arshad says he will not be able to divulge such information or speak of particular accounts, citing regulations and client confidentiality. There are also legal complications as one of the bank’s former CEOs, Shahruddin Zainuddin, is understood to have initiated a lawsuit against the bank after having been removed from his post last year.

“I can only speak about the way forward,”Arshad remarks.

However, he says that necessary provisions have been made for some of the high-profile accounts, without actually naming them. “All the provisions have been made, vis-à-vis some of the high-profile accounts. So we have no concerns whatsoever as far as those accounts are concerned.”

Questionable loans by BPMB previously highlighted by this publication included those to Integrated Nautical Resort Sdn Bhd and Garuda Suci Sdn Bhd — two companies linked to Indonesian businessman Tan Sri Peter Sondakh, who is said to be close to former prime minister Datuk Seri Najib Tun Razak. The two companies, which have been loss-making since 2013, built and operate the St Regis Langkawi and Langkawi International Convention Centre.

BPMB also lent to Asian Broadcasting Network Sdn Bhd, a pay-television service provider that earlier this year auctioned off its equipment — a sign that it does not plan to revive its business. The company is backed by Tan Sri K K Eswaran, who is also known to have close ties with Najib.

Not surprisingly, BPMB’s gross impaired loans (GIL) ratio, although on a downward trend, remained at a high 10.95% as at end-2018 (2016: 15.02%; 2017: 12.15%). In comparison, the average ratio for DFIs was under 6%.

BPMB is wholly owned by the government via the Minister of Finance Inc, but also comes under the watch of the Ministry of Economic Affairs and Bank Negara Malaysia.

Its seven-member board is led by chairman Datuk Zaiton Mohd Hassan who joined on Feb 18. Apart from two members who joined late last year, the rest came on board this year. “All are professionals with many years of experience,” says Arshad.

 

Lifting standards

“As far as governance is concerned, needless to say, it will be a starting point. It will be an ongoing process of strengthening and enhancing the governance culture within BPMB,” says Arshad.

Towards that end, one of the key things BPMB is doing now is to enhance its credit value chain (CVC). This involves taking a fresh look at its processes from the time it originates a transaction, all the way to when the credit committee approves the transaction and beyond.

The CVC enhancement is a two-year programme.

“We are almost mid-way through and will be completing all the components within the programme by the end of 2020. Essentially, we are enhancing the way we evaluate applications, the way we do stress-testing of cash flow. We are ensuring that issues that we might have encountered in earlier transactions in the same sector are brought over to the new assessment, so that we not only educate ourselves with regard to problems that could crop up, but also educate our customers and help them make the proposal more bankable,” Arshad explains.

The bank has a management-level credit committee that assesses loan applications, but any application for financing beyond RM50 million has to be endorsed by the board credit committee.

“The board credit committee has the right to reject the application. However, if the management does not approve a particular application, then the board cannot override the management. So, there are checks and balances in place,” he says.

BPMB has also completed a thorough review of its risk management framework. “We have in place our sector [lending] limits and so on, to ensure that we are fully aware of our risks,” Arshad says.

Apart from that, it has introduced a Code of Conduct and hopes to drum into its roughly 450 employees that compliance is important and that the risk culture is incumbent upon each one.

He says BPMB is also enhancing its consequence-management process. “Consequence management helps us understand what went wrong, why it went wrong and what we need to do to ensure it doesn’t happen again. The idea is not to punish, but to educate.”

 

Evolving

BPMB was set up as a DFI in 1974, mandated to provide medium to long-term financing to the infrastructure, maritime, oil and gas and technology sectors.

“We were established to facilitate nation building, and if you look at the type of projects we have funded over the years, I would say that BPMB has delivered on its mandate reasonably well. But that does not mean that we can afford to continue doing things the way we have for the past 40-over years. So, we decided to take a very critical look at how we operate as a DFI,” Arshad says.

What came out of this exercsie was the acknowledgement that it needed to operate differently, while continuing to be Malaysia’s primary developmental partner.

“As a DFI, we need to understand what kind of impact our financing will have on society, on the population, on the economy. This is not something we have been doing. Going forward, we will evaluate every application from this perspective,” he says.

Giving an example, Arshad says before the banks agrees to grant RM100 million for the construction of a bridge, it must first understand what kind of impact the bridge will have on the population in that area and whether it will result in job creation and an increase in the people’s income.

“We are already working on crafting a framework that would help us evaluate projects, not just from the perspective of financials and credit, but also from [these other perspectives]. There are DFIs in other parts of the world that are already doing this,” he says.

Under BPMB’s three-year strategic plan, which officially starts next year, the group will be sector-agnostic.

“It doesn’t mean that we will stop serving our four mandated sectors, but our focus will become a lot broader. As long as projects can deliver the impact we want to see, then those are the projects that we will be prepared to fund,” Arshad says.

In order to step up, the bank will make available funding to enable its employees to enhance their skills and bring new people in, particularly younger ones. All its employees are stationed at its corporate building in Jalan Sultan Ismail, Kuala Lumpur, which it owns.

“We don’t have any branches as we’re essentially a corporate bank; we don’t have any retail operations. Having said that, going into 2020, we do have plans to open representative offices or branches in other parts of Malaysia. We would like to start with Sabah and Sarawak,” he says.

 

‘Nothing to hide’

The bank’s net profit fell 21.5% to RM167.31 million for the year ended Dec 31, 2018 (FY2018). One of the reasons for this was the higher allowance for impairment losses on loans and financing of RM423.22 million compared with RM302.78 million a year earlier.

Net loans fell slightly to RM18.28 billion from RM19.74 billion before.

“We have a very healthy risk-weighted capital ratio (RCWR) of 37%, which by any measure is comfortable to have. That is also important considering the nature of our portfolio, which comprises lumpy transactions,” says Arshad.

He aims to end this year with net loans of above RM19 billion, which would mean a small loan growth. “We’d had substantial repayments during the year. As we go into the fourth quarter, we are working on some large transactions, mostly infrastructure-related, and if all the deals materialise, then hopefully we’ll end the year at a slightly higher level than I indicated.”

Arshad says the bank’s GIL ratio will trend down over the next three years as its loan book expands and as it tries to ensure that no new major impairments materialise.

“We are essentially a corporate bank and our exposures are all chunky, so when one goes wrong, then the impact is quite significant. That’s not an excuse. We need to ensure that whenever we originate transactions, we stick to our internal processes and credit criteria. If we start evaluating projects a bit too critically, then we won’t be supporting some of the [government’s] strategic areas. So the key thing is striking that balance,” he says.

On criticism that DFIs like BPMB are increasingly playing in the commercial banking and bond market space, he says the bank will step into areas that commercial banks (CB) do not have an appetite for.

“We don’t want to become another CB — that is not our intention. But there are projects that even CBs would be happy to see us participating in — maybe not at the same level, maybe at a subordinated level. We don’t have those products yet, but they will be developed over the next three years,” he states.

There will be keen interest on how Arshad takes the bank forward. A lawyer by training, he was previously the head of global banking business at Maybank Islamic Bhd.

He says it has been a steep learning curve for him but he is glad to have the full support of the board and management team. “I wasn’t expecting this to be a walk in the park. I’m glad I joined, I consider it an honour ... and I intend to deliver.”

“Our stakeholders will continue to monitor us, continue to evaluate our performance, and we welcome that. We have nothing to hide,” he adds.

 

 

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