Asset Management Company: Another subsidy for defaulters!

The creation of the Asset Management Company (AMC) with public money - a new option being planned by the government to reduce default loans - appears to be another move to provide subsidy to defaulters, allowing banks to dump their bad assets on the shoulders of the public.

A bad asset is an asset that has lost all or most of its value.

The Finance Ministry, after failing to reduce default loans by offering various privileges to the defaulters, now seems very keen to form the AMC.

Surprisingly, the multilateral lender Asian Development Bank (ADB) is also very interested in providing financial support for the formation of the AMC.

The ADB recently organized a two-day seminar where it recommended that the government form the national AMC – in a manner similar to the Republic of Korea's KAMCO or Malaysia's Danaharta- to take over non-performing loans (NPLs) from ailing banks.

The AMC concept involves buying up bad loans of banks through direct funding or guaranteeing the support of the government and selling them in the market at more realistic prices, thereby helping banks to reduce default loans.

Industry experts are, however, strongly opposed to this concept, arguing that it will encourage banks in going for an unhealthy practice of creating new default loans and passing them on to the AMC, which essentially will mean passing the responsibility on to the public.

They assert that the concept has been successful in some developed countries where governance is sound. From the Bangladeshi perspective, though, governance remains an issue that will not favour such a move.

In a weaker governance environment, a bank's NPL is generally poorly backed by realizable collaterals as well as flaws in documentations of collaterals, which will cost the AMC much in a recovery of NPLs.

As a result, the AMC will suffer losses, putting pressure on fiscal cost, according to observations by industry experts.

"The potential risk of the AMC is that the NPL of Tk 2,50,000 crore, including pending cases with the money loan court, will just fall on the government's shoulders," said Ahsan H Mansur, executive director of Policy Research Institute of Bangladesh.

He believes the AMC move will be an unmitigated disaster for the public sector in the current political and social environment which creates a serious moral hazard for banks. The danger is that banks will pass bad assets on to the government's shoulders, hiding real price.

He said that many countries have established the AMC, but their context has been different, such as when banks are taken over or go through mergers or are restructured in order to pass on bad assets.

The AMC is an instrument related to the reform process. But in Bangladesh, it is being created without reforming the sector.

"If it is done in the private sector, the government may provide policy support and only then will there be a possibility of success to some extent. That is because, in this case, the AMC will purchase bad assets after fixing the price in a proper way as a way of averting losses," said Ahsan H Mansur.

"The solution to a reduction of default loans lies in enforcing current laws and preventing a relaxation of loan rescheduling rules," he further said.

The formation of the AMC with public money will be another subsidy for defaulters, according to Mirza Azizul Islam, a former adviser to the last caretaker government.

The government is not doing the main tasks that it should do to reduce default loans, such as stopping relations-based lending, political interference in loan approval and applying the law to confiscate collaterals, etc.

The creation of the AMC will help banks to artificially remove NPLs from account statements, similar to the process of loan rescheduling or write-offs.

The government needs to analyse under what conditions other countries became successful or failed in the process of forming an AMC, Mirza Azizul Islam suggested.

The option of creating the AMC has been used successfully in sounder governance environments of advanced markets such as Sweden, the UK, Ireland and Italy. Among Bangladesh's neighbours, Thailand used the system following the East Asian currency crisis of the mid-1990s, while China is using it now.

However, India has refrained from the AMC creation option and has instead been strictly enforcing the bankruptcy act to recover default loans.

Earlier this year, a six-member committee was constituted comprising the Ministry of Finance and Bangladesh Bank on the matter of the formation of the AMC and creation of secondary market for NPLs.

Though no draft has yet been finalized, the initial plan of the committee is to form the AMC in the public sector under the dual supervision of Bangladesh Bank and the Finance Ministry, according to committee members.

After taking charge at the beginning of this year, Finance Minister AHM Mustafa Kamal, rather than being strict with defaulters, opted for a relaxation of various rules aimed at reducing the NPL.

Loan classification and provisioning rules were eased, extending the loan repayment period by three months in June. A special loan rescheduling package was offered, allowing defaulters to regularise loans at discounted down payments for 10 years.

Banks were forced to reduce interest rates to single digits for industrialists.

All these measures were widely criticised by market experts, who predicted that such artificial moves will rather act as an encouragement for defaulters.

Their projections unsurprisingly turned out to be true. Default loans went up by Tk 22,377 crore during the year.