KUALA LUMPUR, Aug 25 — The Senate is set to debate the Consumer Credit Bill next month, with expectations that it will pass without much resistance. If approved, the law could be gazetted as early as November.
Policymakers from both sides have welcomed the Bill, calling it long overdue. The consumer credit industry is now worth billions of ringgit, yet many of its major players remain unregulated, raising concerns about malpractice.
Among the six industries to be governed by the new Consumer Credit Act (CCA) is the business of buying up non-performing loans.
Over the years, impaired loan buyers — known simply as ILBs — have attracted scrutiny from regulators following complaints of “aggressive” recovery tactics and opaque contracts.
What are ILBs and what do they do?
ILBs operate by acquiring distressed or defaulted debt from financial institutions. Their business model relies on the difference between the price they pay for the loan and what they can recover from the borrower.
Banks and other lenders, seeking to clean up their balance sheets and recoup some capital, often sell non-performing loans to ILBs at steeply discounted rates — far below their face value.
The discount depends on several factors: the age of the loan, whether it is secured or unsecured, and the borrower’s profile. Secured loans, such as mortgages backed by property, carry lower risk and command a higher price than unsecured loans like credit card debt. Conversely, the harder it is to recover the debt, the deeper the discount.
What happens after the loans are sold?
Once ILBs legally acquire the debt, their goal is to recover as much of the outstanding amount as possible.
They may offer new repayment terms — for instance, lower monthly instalments over a longer period — in hopes of persuading borrowers to resume payments. Clear communication is key to getting borrowers back on track.
If negotiations fail, ILBs may resort to legal action to enforce repayment.
Sounds like a legitimate ‘ah long’. Are they?
Not exactly. Unlike illegal moneylenders, ILBs operate within the formal financial system. But until recently, they were largely unregulated.
In June 2024, Bank Negara Malaysia issued its Policy Document on Disposal and Purchase of Impaired Loans/Financing, essentially a loose rulebook for good industry practice.
The guidelines require ILBs to demonstrate a proven track record in debt management and to adhere to strict standards of conduct. They also compel lenders to be transparent about loan sales, with borrowers to be notified in advance when a bank intends to sell their loan.
What will change with the CCA — and how will it affect borrowers?
The primary aim of the CCA is to protect borrowers. This is the key rationale for regulating ILBs. Once a loan is sold, the borrower’s relationship with a regulated bank ends, and a new one begins with a non-bank entity.
With the CCA in force and a competent authority overseeing the sector, borrowers will have legal recourse to report abusive or unfair practices by ILBs that use aggressive, intimidating or unethical collection tactics.
The Act also enhances transparency. It makes it mandatory for borrowers to be informed about the sale of their loan, including the identity of the new owner and the terms for repayment.
Non-compliance could result in hefty penalties, including fines of up to RM1 million.
