SDBank hid RM5bil in bad loans through creative accounting, says Masidi

KOTA KINABALU: Decades of creative accounting at state-owned Sabah Development Bank (SDBank) hid losses through non-performing loans (NPLs) amounting to over RM5bil, says state Finance Minister Datuk Seri Masidi Manjun.

In a detailed and stunning disclosure at the state assembly here on Wednesday (July 10), Masidi said the NPLs made up 75% of the total RM6.6bil loans issued by the bank as of May.

He said apart from creative accounting by providing fresh loans to borrowers to cover up their NPLs, there had been a total management meltdown in checks and balances for approving loans to unqualified companies.

"SDBank has been giving out loans to borrowers, and when the borrowers are unable to pay, creative accounting is applied.

"New loans are created to pay for the overdue repayments so that these loans would not go into the non-performing category.

"This is like digging a bigger hole to cover an old hole. There will be more holes and they will get even larger," he said when replying to Datuk Seri Mohd Shafie Apdal (Warisan-Senallang).

Masidi explained that the new loan principal and interest overdue from borrowers on paper made it appear as though the original amount had been repaid and "collection" was done with the interest owed showing as "income earned" in the bank's books.

"The NPL numbers will also be reduced as these loans are now seen to be performing," he said.

Masidi said these loans dated back to 2003 and the previous management of the bank had been able to report profits to the tune of RM580mil over the past six years through this "creative accounting".

"The result is that, for years the SDBank had been showing, in its books, good but cashless collection, inflated interest revenue and a disguised NPL percentage.

"We cannot disclose the names of the companies and their owners due to the confidentiality obligations between SDBank and the borrowers per the Financial Services Act (FSA) 2013," he said.

He also told the assembly that the problems at SDBank were a legacy issue.

He said SDBank raises funds by borrowing from the bond market.

"Actual cash collection by SDBank was not sufficient to cover the bond repayment due," he said, adding that the bank then had to borrow more to meet the bond repayment, resulting in ballooning debt.

"SDBank had not adopted financial institution best practices in updating the valuation report for its security assets every two years.

"SDBank has been nicknamed by the market as a 'bank of last resort', meaning borrowers turned down by other banks would try their luck there.

"When some of these borrowers got lucky, the bank ended up with 75% NPLs," he said, adding that the former management took little or no legal action to recover the bad debts and chose to disguise them instead.

"(This adds up to) a governance nightmare with questionable oversight, checks and balances and internal controls in credit and risk management," he said.

The new SDB board and management that took over in July last year was now carrying out a rigorous review of security assets and had no choice but to take the bull by its horns, he added.

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