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Advances Against Own Shares

Section 59 prohibits the granting by the licensed institution of any credit facility against the security of its own shares or the shares of its holding company.

Granting of Unsecured Loans

By virtue of section 60 a finance company is prohibited from granting any credit facility to any person without security which together with other unsecured facilities earlier given to such person exceeds an aggregate sum set out in an order published by the Central Bank in the Gazette. The present limit is RM10,000.

This restriction does not apply to credit facilities given to another licensed institution or to other financial institutions approved in writing by the Central Bank

BAFIA does not define an 'unsecured loan'. Instead section 60(4) provides that a security in respect of a credit facility shall consist of property of a value which is not less than the amount of credit facility given to such person. The word ' property' is given a very wide meaning in section 2 and event includes a guarantee, indemnity and intangible property. But Section 60(4) requires the property to be capable of being evaluated thus effectively excluding guarantees, indemnities and the like. The 'value' of the property taken as security shall be : Section 60(6) provides that if during the tenor of a credit facility the value of any security falls below the outstanding amount, the finance company shall require additional security to be provided by the borrower within 14 days failing which the borrower shall be deemed to be in breach and the finance company shall be entitled to exercise its rights under the loan contract in respect of a breach thereof.

Therefore, it is mandatory to monitor the security coverage of all credit facilities at all times and give the borrower the necessary notice the moment the security value falls below the amount of the facility outstanding . On the other hand, the finance company is free to call for a higher margin of security to be maintained at all times.

In addition, the Central Bank may issue directives on limitations or restrictions on the taking of any particular type of property as security.

Restriction of Credit to Single Customer

Section 61 provides that no licensed institution shall grant to any single person any credit facility or incur any liability whatsoever on behalf of any single person in excess of any amount prescribed by the guideline issued by the Central Bank.

The above limitation does not apply to 'Single Person' is defined in section 61(4) as being Note : 'family corporation' is defined in section 46(4) of BAFIA as a corporation in which holds singly or with the others mentioned above interests in shares of more than 50% of the shares of the corporation. Note :   'related corporation' is defined in section 6 of the Companies Act, 1965 to mean 'Credit facility' is defined in section 2 of BAFIA to mean any form of facility whereby a person is given access, directly or indirectly, to funds and includes the giving of a guarantee.

The current guidelines are found in "Garispanduan 5'. These guidelines are issued pursuant to the Banking Act 1973 for application to commercial banks. However, finance companies are required to observe the spirit of the guidelines.

The limit of credit facilities granted to a single person is set at 30 per cent of a local bank's capital funds. The limit will apply to the approved limit or the amount of loan outstanding, whichever is higher

In addition to the above limit, banks are required to observe an overall limit for ' large' loan, which is set at 50 per cent of the bank's total credit facilities. A 'large' loan means any credit facility granted to customer which in the aggregate exceeds 15 per cent of the bank's capital funds.

Prohibition of Credit Facilities to Director and Officer

Section 62(1) of BAFIA provides that unless exempted by the Central Bank in writing, no licensed institution shall grant any credit facility to the following Note : 'director' is defined in section 2 to include any person who occupies the position of a director, by whatever name called and also any person having the direction and control of the management of its affairs or business Note :'manager' means any officer responsible for an office, or for a department or a division of an institution Section 63 of BAFIA qualifies any credit facility granted under any exemption or exception under section 62 (other than staff loans given to its officers and executive director). The creditworthiness of the customer must not be less than that normally required of other customers, the terms must not be less favorable to the licensed institutions that those normally offered to other persons, and the giving of the facility must be in the interest of the licensed institution

Such facility must be approved by all other directors of the licensed institution (i.e. other than the director related to the potential borrower) at a duly constituted meeting of the directors where not less than three quarters of all the directors of the licensed institution are present and such approval must be recorded in the minutes of the meeting

The Central Bank has issued Garispanduan 6 as as guideline to section 26A Banking Act, 1973 (which has now been repealed and replaced by section 62 of BAFIA). Along with these guidelines there is a list of development institutions such as Permodalan Nasional Berhad, Cagamas Berhad for which blanket approval is granted.

Section 64 requires director of a local licensed institution to declare any interest whatsoever that he has in a proposed credit facility as soon as it is practicable. The declaration must be made in writing at a duly constituted meeting of directors and the secretary shall distribute the notice to all the directors whether or not they attended that meeting. Alternatively, the director may in writing notify every director and such notice make a declaration of any interest, property or office held by him which might be in conflict with his duties or interests as a director of such licensed institution

Control of Credit Limit

Section 65 of BAFIA prohibits any director or officer of a licensed institution from giving any credit facility in excess of the limit or outside the scope of any terms and conditions imposed on him by the licensed institution or in contravention of any directions given to him by the licensed institution or in contravention of any directions given to him by the licensed institution. The Central Bank is empowered to call for the credit policy of the licensed institution and, if necessary, direct the institution to amend the credit policies and lending limits of its directors and officers.
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