Historically bad loan situation turns govt creative
The government is homing in on forming a public asset management company (PAMC), a brainchild of Finance Minister AHM Mustafa Kamal, as part of its efforts to redress the financial sector that is fast approaching a losing battle against default loans.
The finance ministry has already prepared a draft act titled “Bangladesh Asset Management Company Act” to purchase default loans from banks and sell them off to individuals or corporate entities.
Work on enacting the draft law is going on at bullet speed given the escalating trend of default loans in banks, said four officials of the government and the central bank involved with the process.
Until September last year, default loans in the banking sector stood at Tk 116,288.31 crore, up 23.82 per cent from nine months earlier.
“Our first objective is to enact a full-fledged law within the quickest possible time. But it will take at least six months more to make the PAMC functional,” said a Bangladesh Bank official on condition of anonymity as he is not authorised to speak to media.
PAMCs have been deployed in a handful of countries with the view to bringing down default loans. But the result has been mixed.
South Korea and Malaysia saw the greatest success with the model, with their recovery rate being 46.8 per cent and 58 per cent respectively. The recovery elsewhere is less than 30 per cent.
It is the success of the two countries that have encouraged the government to form the PAMC, the BB official said.
The company will kick off its operation with an initial paid-up capital of Tk 5,000 crore.
“The amount of paid-up capital will be increased from time to time. If required, funds will be raised by way of issuing bonds in the capital market,” according to the draft act.
The PAMC will be allowed to ink agreement with both local and foreign institutions in order to increase its capital and funds.
The Asian Development Bank has already showed its interest in providing financial support to the government in setting up the PAMC.
The Manila-based development lender has already given different types of technical support to the government to this end.
“We will be happy to provide financial support if the agency receives proposal from the government,” Manmohan Parkash, country director of the ADB, said in a conference on November 26 last year.
The PAMC will take over the default loans, including collaterals such as lands and industrial plants of defaulters.
An official of the finance ministry said the government has yet to prepare a business model for the PAMC. “Different methods are now being considered,” he said.
The company may take the default loans off the banks’ hands in exchange for special bonds that would have certain maturity, enabling the lenders to keep provisioning for bad loans.
In some cases, the company will restructure the mortgaged assets and industrial plants after taking over those from banks.
The restructured assets will be sold to local and foreign investors by arranging an auction, the official said, adding that the PAMC will even sell the default loans directly if there is interest.
Besides, advisory support will be given to clients so that they will not face any trouble by holding the toxic assets.
In order to make the PAMC vibrant, a secondary market for default loans will be created, where people would be allowed to buy and sell default loans, the official said.
As per the draft act, the government will form the board of directors of the PAMC comprising of 13 members, of which 12 will come from the different government agencies and the rest from the Federation of Bangladesh Chambers of Commerce and Industry.
The tenure of the board will be three years and a member will hold his/her directorship for a maximum of two times in a row.
The central bank will be empowered to monitor the PAMC’s operation and it will prepare regulations on how the company will run as well.
The PAMC, which will enjoy tax rebate facility on its income, will be allowed set up a number of branches in different parts of the country.
The company could invest its income in profitable sectors like banks and non-bank financial institutions.
Annual financial statement of the PAMC will have to be submitted to both the government and the central bank.
Experts -- and the immediate past finance minister -- welcomed the move cautiously: its success rests on ensuring corporate governance.
“I think the PAMC can improve the situation. It depends on how the company decides which asset it will take and in what condition,” AMA Muhith, former finance minister, told The Daily Star in an interview earlier this month.
If the PAMC does that stringently, there is no chance of banks exploiting it and dumping their bad assets on it.
“At the same time, banks whose assets are being taken over PAMCs, those banks must be punished in another way,” Muhith added.
The government should amend all financial sector related laws such as Banking Companies Act 1991, the Money Loan Court Act 2003 and the Bankruptcy Act 1997 before commencing the operation of the PAMC, said Zahid Hussain, former lead economist of the World Bank’s Dhaka office.
Habitual defaulters frequently misuse the loopholes of the acts to be kept themselves from getting punishment, he said.
The government should clamp down on the wilful defaulters, confiscating their passports and boycotting them socially and economically.
“The PAMC will not work out at all if the habitual defaulters continue to enjoy impunity for their delinquency,” Hussain said.
Fahmida Khatun, executive director of the Centre for Policy Dialogue, echoed the same.
She said the draft act for the proposed PAMC mentioned that 12 out of 13 directors will come from government organisation, which is not a good idea at all.
“The financial regulators have showed frustrating performance in improving governance in the sector in recent years. So, how will they operate the PAMC properly?”
The government should consider academicians, economists, representatives of civil society and the private sector for the formation of the PAMC’s board of directors, Khatun said.
“It is a good step beyond doubt, but the initiative will not be successful if governance cannot be strengthened,” said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.
Default loans may go up further if both lenders and borrowers think that they will be able to transfer their toxic assets to the PAMC.
“So we have to implement our rules and regulations strictly to sidestep such situation.”
The standard of collateral taken by banks is not good at all.
“So how the PAMC will fix the valuation of the collaterals is an important issue,” said Rahman, also an immediate past chairman of the Association of Bankers, Bangladesh, a forum of managing directors of banks.
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