The government plans to form an asset management company this fiscal year to buy distressed loans off banks as part of its efforts to clean up the financial sector.
As per the roadmap, the government will draw up a special law to form a public asset management company (PAMC) in the lead up to the next budget for fiscal 2020-21.
The law will empower the PAMC to purchase non-performing loans (NPLs) from banks and sell them off to individuals or corporate entities by way of sidestepping court instructions, said a finance ministry official.
The PAMC will acquire default loans from banks after doing due diligence and also the sick institutions saddled with bad loans and restructure them. The restructured asset will be sold at a premium then, he added.
The development means banks will soon get respite from the legal complexities to recovering their default loans.
The government has recently formed a five-member committee comprising of officials from both the central bank and the finance ministry to speed up the process for formation of PAMC.
The committee, which was formed following a feasibility study in June, is now working on framing the draft act, which may be enacted in the parliament session for next fiscal budget, according to the finance ministry official.
Its member will attend an international conference organised by International Public AMC Forum (IPAF), an organisation of seven countries’ PAMCs, in Seoul, South Korea later this month to gather more information.
The IPAF members will also purchase the default loans from Bangladesh if the country’s PAMC joins the organisation.
“This will also give a boost to the country’s foreign direct investment,” the official said. Meanwhile, earlier in August, in a meeting with the finance ministry the Asian Development Bank showed interest in providing technical and financial support to the government for creation of the PAMC, he said.
The Manila-based multilateral lender has extended similar support to a number of countries, which eventually helped them arrest their default loans.
The bid to form an AMC got momentum after the central bank report titled “Feasibility Assessment of Establishing of a Public AMC in Bangladesh”.
Prior to that the central bank formed a six-member committee in February with a view to tackling the rising default loans in the banking sector.
The committee found the AMC formula after conducting an extensive analysis of seven Southeast Asian countries on how they had brought down their large amounts of default loans after facing a major recession -- widely known as the Asian financial crisis -- between 1997 and 1999.
Each of the seven countries -- Vietnam, South Korea, Indonesia, Malaysia, Thailand, Taiwan and the Philippines -- successfully brought down their classified loans by way of setting up PAMC.
For instance, default loans in Indonesia had gone as high as 50 percent of its outstanding loans during the financial crisis, but it came down to less than 3 percent in 2017. The total amount of default loans in the banking sector stood at Tk 112,425 crore at the end of June, up 20 percent from six months earlier.
“The government has recently taken a decision to not recapitalise state lenders further as it is now eyeing to perk up their financial health by way of decreasing their default loans. And the PAMC will play a great role,” he added.
For the PAMC to function effectively, a vibrant secondary bond market would be needed.