EXCESSIVE evergreening of loans will now force troubled Sabah Development Bank (SDBank) to declare significant financial losses for two consecutive years.

State Finance Minister Datuk Seri Masidi Manjun exposed the state-owned bank’s precarious situation, revealing that it had masked its losses for years by issuing fictitious loans to conceal a growing pile of non-performing loans (NPLs).

“After years of reporting profits amounting to RM580 million over the past six years, SDBank will report substantial financial losses for 2023 and 2024,” Masidi announced during a question and answer session at the Sabah Legislative Assembly today.

“It is not just the financial loss; the quality of existing loan assets is poor. Out of the RM6.6 billion loan portfolio as of the end of May 2024, 75%, or RM5 billion, are non-performing loans.”

Masidi was responding to a question from Sabah opposition leader Datuk Seri Mohd Shafie Apdal (Senallang-Warisan).

“The bank has been issuing loans to borrowers, and when they couldn’t repay, creative accounting was used to mask the issue.

“New loans were created to cover overdue repayments, preventing these loans from being classified as non-performing,” Masidi explained.

The situation spiraled out of control as the volume of bad loans grew so large that the bank could no longer cover the debts raised through bond issuance.

“This forced the bank to borrow more to repay the bonds, resulting in ballooning debt,” he said.

SDBank failed to update the valuation of its collateral assets over the years further adds to its financial woes, said Masidi.

Accurate valuations are crucial for securing further borrowing, and a recent review revealed that the collateral assets were so outdated that substantial provisioning was required for 2023 and 2024, he said.

Masidi noted that effective debt recovery efforts only began in July last year when a new board took over.

“As of the end of June 2024, all 43 NPLs (100%) have had legal actions initiated.

The new board has set a target of recovering RM1 billion in NPLs per year for the next three years and plans to exit Peninsular Malaysia by then,” he stated.

Masidi also disclosed that a report had been lodged with the Malaysian Anti-Corruption Commission (MACC) following allegations of kickbacks by past management in April.

Between 2013 and 2018, SDBank loaned approximately RM8 billion to numerous companies in Peninsular Malaysia, with 95% of this amount going into property development in Kuala Lumpur, Selangor, and Johor.

“The board and management are now firmly guided by a new mandate to pursue development projects that are economically and socially meaningful and environmentally responsible in Sabah, and Sabah only.

“In the first five months of this year, the bank has rejected RM1.5 billion in loan applications that did not fall within this scope,” Masidi said.

Meanwhile, he said RM616 million was approved in the sectors of oil & gas (RM426.5m), energy (RM96.3m), construction (RM62m), and infrastructure (RM32m), all to entities in Sabah in the first six months of this year.

Masidi also noted a reduction in the bank’s burden of bad loans, which shrank to RM3.9 billion in May this year from RM5 billion previously.

This reduction followed the acquisition of the once debt-ridden Sabah International Petroleum (SIP) by the state oil and gas firm, SMJ Energy Sdn Bhd.

All three entities are state-owned firms.