Secured Lending Versus Clean Lending Antara Pinjaman Bercagaran Dan Tidak Bercagaran

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Over the past few days quite a few politicians and activists have become overnite banking experts. They are criticising Maybank for making a loan to Genting Hong Kong without any security (also known as collateral). The Malay word for collateral is cagaran.
Banks can either lend money based on collateral (secured lending) or without any security or collateral. Also known as "clean" lending.
Despite all the accusations Maybank is not able to reply the critics because Maybank is legally bound not to divulge information about its clients, especially details about the terms and conditions of the lending. Banks are bound by the BAFIA or Banking and Financial Institutions Act, where bank officers can be sent to jail for breach of what is just business. I call it the Buffoon Act (Buffoon means ridiculous, foolish). 
Indeed banking is just another business, like a barbershop or an airline. You dont jail a barber who cuts your hair wrong. Neither do you jail a doctor who makes a wrong diagnosis that may not save the life of a patient. You dont jail a GLC CEO for making millions in losses (which is actually not a bad idea). So why the fuss about Bank Officers?

I will not be surprised that Genting is able to borrow money from the banks in Malaysia on a Clean basis (ie without collateral or tanpa cagaran). 
This is because Genting is a major corporation, a very large and successful company which has been profitable for decades. They are a good credit risk and a sought after borrower. It is most likely that many banks are lining up to extend loans to Genting. Which has probably given Genting the luxury of borrowing from the banks without collateral. 
And Genting Hong Kong's problems are not because of poor management or a failure to compete. ALL CRUISE operators in the world are going bust because of the COVID 19 pandemic, which struck so suddenly.

Some say that Singapore banks which loaned money to Genting Hong Kong are secured. So why not Maybank?  There could be multiple and valid reasons for this. 
Genting is a Malaysian corporate. They have been operating successfully here for 57 years since 1965. Malaysian banks are very familiar and perhaps comfortable with the Genting group as a good credit risk.  Plus they do have significant assets (landed assets) all inside Malaysia like the Genting Highlands Resort, their vast plantation holdings and other assets. So Malaysian banks may feel more comfortable with lending clean to the Genting group.

Clean versus secured lending is something that has to be agreed between the bank and the borrower. 
During my early years in banking (late 1980s) I tried to lend money to a famous shoe manufacturer that had been operating successfully here since the 1930s. The merchant bank I worked for at that time did not have a relationship with them so I decided to give it a try. 
The shoe manufacturer was well banked - meaning they had all the bank borrowings that they needed. And their borrowings were "Clean". Meaning other banks were lending money to them without collateral. Unsecured lending. So if my bank wanted to 'penetrate' their business I had no choice but to offer them clean lending too. 
Which I did but they still did not take my offer because they were over-banked. They had more than enough banking facilities from other banks.  
Another example was the K__k Group. This was when I was in Maybank. The K__k Group undoubtedly was (and still is) a major corporate player in Malaysia. They held huge assets in plantations, hotels, manufacturing, insurance, trading, logistics etc. They have a few listed companies as well.
One day in the late 1990s they made a mistake and bought a bit too many shares in their own listed company. (I think it was P____s Plantations). They crossed the 30+ % (??) shareholding threshold which triggered a "General Offer" condition. The moment you cross the 30+% shareholding in a public listed company then the rules of the KLSE require that within a very short time (a matter of a few days) you must make a general offer for the remaining 60+% of the shares floating in the market. Otherwise you will be hit with a vey large fine.
In lieu of making a General Offer the 'offending' company can also deposit cash (yes cash) or provide a Bank Guarantee to cover the market value of all the free float shares (or something like that lah - I cant recall the exact details). In the case of the K__k Group that amount (at that time) was RM1.1 BILLION !! 
Of course even the K__k Group did not have RM1.1 BILLION cash just lying around. So they called Maybank for a Bank Guarantee.  Yes they called us and asked us to come to their office. This was the "power" of the K__k Group. So I had to go with a colleague from Maybank to K__k's office in that nondescript building in Bukit Bintang. And we met K__k's Number 1 man in Malaysia, that white haired gentleman. 
And the K__k Group was a "Clean" borrower with us. In short we 'agreed' to give them a Bank Guarantee for RM1.1 Billion within 48 hours or something on a Clean basis - without any security. 
Then I breached the BAFIA. Any lending of that amount had to be approved by the full Board of Directors of Maybank. But the Board was not scheduled to meet till month end. I wrote the paper quickly and got it sent to all the Bank's Directors for a "circular resolution" - meaning the Directors could sign it one by one, without having to meet. The bank's directors were not all in KL at that time. They were all over the place and one director was travelling in Africa! And that was the director who did not sign.
Time was running very short and the K__k group could be hit by hefty fines. Of course we did not want to embarrass our eminent client. So I went to see my General Manager and explained the situation. All the Bank's directors had signed except the one director who was overseas. Time was really short and I had to issue the Letter of Offer for that RM1.1 Billion Bank Guarantee. I had been informed by Maybank's secretarial office that the Director would be coming through but not in adequate time. 
I had no choice but to refer to my own boss - the General Manager - for the decision. This is when my General Manager (who is a really cool guy till this day) decided to follow the sunnah of the Prophet. 
The lebai fellows say that when the Prophet was asked a question he would do three things. No.1 He would say yes,  No.2 he would say no, or No.3 he would remain silent.
My boss decided to follow option 3.  He remained silent. Meaning it was my call. So without the complete endorsement of the full Board of Maybank I went ahead and issued a Letter of Offer for RM1.1 Billion. I made the Bank legally obliged for RM1.1 Billion without the full approval of the Board of Directors.And it was a Clean guarantee - without any collateral.

That last director did not sign until four days later - after he had returned to KL. The info I received was that he was not happy to sign for such an amount without a full Board meeting. But he eventually did sign his approval. Meaning for FOUR days I was in breach of the BAFIA. 
That RM1.1 Billion  Bank Guarantee lapsed a few days later because the K__k Group was able to rectify the situation with the KLSE. 

The gist of the matter is that the Bank's have to make decisions within the risk and credit parameters existing at that time. You have to make a judgement call.  To safeguard public funds deposited with us as well as to provide banking services to our clients which would generate earnings for the bank to share with its shareholders and depositors. That is why we were paid to do our jobs.
The views expressed are those of the writer and do not necessarily reflect those of MMKtT.
By Syed Akbar Ali 

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