Malaysia's economy will be boosted by new guidelines on non-performing loans which could allow banks to clear up to one third of the bad debt clogging their books, said PricewaterhouseCoopers today.

"There is a high chance of 25 to 30 percent of NPLs to be sold. We think it can happen in the next two years," Lee Chui Sum, PricewaterhouseCoopers executive director of business recovery services told AFP .

Lee said most of the non-performing loans (NPLs) would likely be picked up by foreign players and that this would have a positive impact on the economy.

"This could be in the form of foreign investment flowing into the country. A number of foreigners have been calling on the banks already," she said.

Lee said the sale of NPLs would also allow banks to focus on providing fresh credit, further stimulating the economy which is expected to grow 5.5 percent this year against an estimated 5.0-6.0 percent in 2005 and 7.1 percent in 2004.

The central bank late last month released new guidelines allowing banks to sell their NPLs to domestic banking institutions, including locally incorporated foreign banks as well as domestic and foreign investors.

NPL ratio still high

The measure, which affects an estimated RM46 billion in gross non-performing loans, is in line with a financial masterplan to strengthen and consolidate the Malaysian banking sector.

"A bank weighed down by a high NPL to loans ratio is hampered in its ability to give out new loans," PricewaterhouseCoopers said in a statement this week.

"By removing a substantial portion of NPLs from the balance sheet ... the affected bank could return to a healthy position with a renewed portfolio of loans assets, leading to an improved risk weighted capital ratio."

PricewaterhouseCoopers said Malaysia's net NPL ratio as at end-2005 stood at six percent, well below the 13.6 percent recorded in 1998 at the height of the Asian financial crisis.

"Even so, six percent is comparatively seen as an unacceptably high ratio and more could be done to expediently clean up the layer of NPLs that seems to remain stubbornly in the banking system," it said.

Lee said NPLs in developed countries were around one to two percent and that "there was some room for the NPLs to come down in Malaysia."