Draft law for NPL resolution deviates from int’l good practices in Bangladesh: WB

The World Bank is not satisfied with a new law proposed by the government of Bangladesh to address non-performing loans in the country's financial sector. The draft law, called the Bangladesh Asset Management Company (BAMCO) Act, does not adhere to international best practices, says the multilateral lender.

The proposed law also goes against suggestions from the International Monetary Fund (IMF) and the World Bank. These global lenders recommend solutions led by the private sector, but the draft law doesn't include important things needed to successfully sell the unpaid loans. The missing parts include how the Asset Management Company (AMC) should be governed, how it should operate, the money it needs, and the rules it should follow.

The observation came after the International Finance Corporation (IFC) and World Bank team reviewed the draft BAMCO Act 2020, which proposed to be a state-run entity that will work under the Financial Institutions Division of the Ministry of Finance to purchase default or bad loans from banks or financial institutions and specialised banks and sell them off to individuals or corporate entities.

The World Bank called on the government to revise the BAMCO and other legislative acts and regulations, making them private sector-led solutions to facilitate the participation of the private sector in NPL resolutions in the country.

Abdoulaye Seck, country director for Bangladesh and Bhutan of the World Bank, and Martin Holtmann, country director of the IFC, jointly sent the letter to Financial Institutions Division Secretary Sheikh Mohammad Salim Ullah in the first week of December calling for the revision of the draft BAMCO act.

Mentioning the previous discussions on the draft in 2019-2021, the letter said that "there was a consensus within the World Bank experts and with local authorities to focus efforts on the development of enabling legislation to support NPL resolution through private sector-led intervention and to facilitate the participation of private domestic and international investments in the purchase and workout of NPLs."

"To this effect, special knowledge visits were organised by IFC with support from the World Bank Insolvency Program to Greece and Spain in January 2023 to share relevant experiences in private sector-led NPL resolution efforts."

"In contrast, the latest draft of the BAMCO Act, as reviewed by the IFC and World Bank team in April 2023 (with comments shared with the BAMCO Committee in May 2023), continues to support the creation of a public sector AMC. The draft Act deviates from the international good practice and contradicts the IMF recommendations for Bangladesh given the absence of preconditions for an effective public AMC".

The letter also mentioned the IMF recommendations, which read, "Absent reforms to stem the flow of NPLs, establishing a public asset management corporation (AMC) poses significant fiscal risks. Moreover, it is not obvious that the AMC would have more expertise in resolution than the banks housing the NPLs. International experience suggests that the success of an AMC depends on good governance and sound design."

"The proposed BAMCO draft law should address issues related to its mandate (no sunset clause, lack of details on how and when assets will be transferred, and valuation of assets), governance (potential for conflict of interest, expertise of the management), operational arrangements (lack of details on third-party management), and transparency and accountability (no requirement for the regular publication of performance against targets)."

The World Bank raised concerns over the existing vulnerabilities in the banking sector, especially the large stock of NPL, on the back of growing credit risks, insufficient loan loss provisions, a lack of effective loss recovery methods, and the NPL resolution framework, which can undermine financial sector stability, reduce market confidence, and hamper credit growth.

Defaulted loans in the banking sector stood at Tk1.55 lakh crore in September, which was close to 10% of the total outstanding loans, according to Bangladesh Bank data.

As of September 2023, banks' provision shortfall stood at Tk25,270 crore, up from Tk21,464 crore in June.

State banks, which account for a major share of default loans, are struggling to recover loans from top defaulters due to dismal performance caused by the ongoing economic slowdown and irregularities in loan disbursements.

For instance, four state-owned banks have managed to collect a mere Tk119 crore from their top 20 defaulting borrowers in the first six months of 2023. This figure represents a dismal 5.43% of their ambitious target of collecting Tk2,190 crore from these defaulters.

The top 20 defaulting borrowers owe a staggering Tk23,421 crore to four state-owned banks – Agrani, Janata, Sonali, and Rupali Bank.

In the letter, the World Bank encouraged the authorities of Bangladesh to consider developing draft legislation that provides a holistic framework, with supporting instruments as well as supporting regulatory and tax regimes, for private sector-led NPL recognition, recovery, and resolution and that enables private sector investments.

"The government's decision and support for this reform will be crucial for catalysing market development, mobilising private sector investments, and minimising fiscal costs," said the letter.

The letter also sought confirmation for the development of legislation based on private sector-led solutions to facilitate the participation of the private sector in NPL resolutions in Bangladesh.

The World Bank also wants to support the authorities in developing a comprehensive NPL resolution strategy, providing guidance for revisions to BAMCO and other legislative acts and regulations, as well as assisting with their implementation and knowledge transfer for financial sector stability and the development of a sustainable market, according to the letter.