Since 2008, the economic crisis spread out all over the word, the system of economic have been destroy very heavy. Lots of financial institutions and country bear the loss. But it seems than the U.S. and European economies to a lesser extent. However, most countries have reported a larger number of non-performing loans, and this trend is expected to continue into 2009. Non-performing loans is one of a factors that leading economic crisis. Because of it, financial system especially bank system become more weak.
Non-performing loans refer to the event of default loans. In general, the borrower if the delay in debt service for three months, loans that will be treated as non-performing loans. Banks in determining the non-performing loans have been unable to recover when the profits should be canceled. Unable to recover overdue loans, but has not yet determined when the books should be set aside in the bad debt losses
Non-performing loan ratio of financial institutions to evaluate the credit assets of financial institutions, an important indicator of the security situation. The high rate of non-performing loans, indicating the risk of recovery of loans of financial institutions large; non-performing loan rate is low, indicating the risk of financial institutions to recover loans of small.
RAM Rating Services Limited expects the local banking sector's total non-performing loans (NPL) ratio to achieve in the current financial turmoil, this year's 9%. In the most serious ", opposed to 4.1% 9% this year, as at December 2008," head of financial institution ratings Promod Dass said.(the star online)
2 Causes of non-performing loans
If a owner want to increase his size of firm but finally he find not have enough money . Then he should borrower money from bank. The bank will see whether his credit performance enough or not. If he have good credit and project bank will agree to lend money to him. After three month find the business is not good and profit is negative can not pay back money to bank. Then the money can not pay back we called non-performing loans.
Here some reason why Causes of non-performing loans
First is the thinking of "The bank money is the country's" is a major problem led to non-performing loans. Investment banking is mainly engaged in the issuance of securities, underwriting, trading, corporate restructuring, mergers and acquisitions, investment analysis, venture capital, project finance and other business, non-bank financial institutions, capital market's major financial intermediaries. Some people think bank's money is equal to country. This is a wrong idea. Bank lend you money to increase your firm so the lenders is bank, not country.
Second is Borrower's credit is not strong, liquidity is too low, leading to non-performing loans resulting from objective reasons. Some of borrowers do not worry how to pay back the money to bank at all. When they short of money they ask bank for loans. Many of our firms do not have full liquidity, it is impossible to pay off all debts owed, while the enterprises to survive and develop, we must seek to increase their sources of funds, to reduce its debt burden, in this case, enterprises in arrears bank loans, evasion of bank debt is inevitable. This is a terrible circle. You lend money from bank but cannot pay back, to let you pay back money bank will give you enough support to let you do your business .When someone wants to lend money bank should figure out if he has any bad records or not .If not then bank should know the way he use this money and purpose and find out how can he pay back it. Only by establishing a complete set of credit measures we can totally solve this problem.
Third is bank management level is not high, risk prevention capability is not strong, leading to non-performing loans increase. Some organization, the concept of credit is not strong, and in Malaysia is not disloyal person in charge of enterprises and their lack of strict and effective sanctions related to the solvency of the firm has a direct relationship. If a financial situation have too many non-performing loans the leader of the organization will be fired.
3 Influence of non-performing loans
According to Japan's experience, the Malaysia economy like Japan's has been dragged down by bad loans. Now, more and more people see the dangers of non-performing assets.
Meanwhile, Fitch's head of Asia-Pacific sovereigns James McCormack said Malaysia's massive RM60bil stimulus package would put pressure on the country's sovereign rating in spite of its strong foreign reserves position.
"(Malaysia's fiscal position) is weak to start with. So the additional stimulus program is going to make that a bit worse," he said.
The high rate of non-performing loans, the biggest hazards affecting the banks in the economy support. Malaysia's bank loans in recent years is extremely cautious, it is because too many bad loans, affecting bank lending capacity. When country want to build some foundation building or public building then it will find that bank have no money to let country to build. It will decrease the develop of one country. If bank print more money to solve this kind of problem, it is easy to cause inflation. Lots of non-performing loans even can make moral hazard. People do not trust bank any more. Many firms face to bankruptcy sooner or later.
The number of non-performing loans will increase the cost of government. Those people who want to lend money from bank is very difficult but some people do not have this kind of problem. Finally people do not trust bank any more. It is a huge loss.
If the base money to address by issuing non-performing loan problem, easy to lead to inflation. If the right of the guard, a large number of non-performing loans will lead to social moral hazard occurs, if the non-performing loans to increase the intensity of treatment they may give rise to corporate chain bankruptcies, and increasing financial risk and social crisis.
4 Solutions
From above research we can clear see it that non-performing loan have to decrease. Here some ways to solve it.
Strengthen the operational supervision of financial enterprises to ensure the quality of every loan in the future to prevent new bad loans arising. The non-performing loan and manager of the financial institution is related. When manager can not performance he will be fired.
Greater efforts to develop high-quality credit market, to speed up resolving non-performing loan. From several useful points can solve this situation. First is take new risk management concept. Second is Speed up the credit management rules innovation, everyone should have a credit record to record his own credit performance. The record have to connected to all financial organization. Government need legislation new law to protect the capital of bank. Punish the manager of bank and owner of the firm cannot pay back the money.
Only decrease non-performing a country can development it's own economic quickly. keep on the level of market confidence and the stability of the Malaysian financial system stable.
