Asset management companies for managing bad loan

Banks in Bangladesh have non-performing loan (NPL) or bad loan and the amount of such loan is increasing day by day. There is a very strong law namely Artho Rin Adalat Ain, 2003 (ARAA) or the Money Loan Court Act, 2003 to recover loan but banks are now asking for a stronger law and criticise the legal system for their failure to recover NPLs. The ARAA is a black law as it is a one-way law for filing case by banks against borrowers and curtails the authority of the court to hear from the defendant. There is virtually no alternate dispute solution system under this act. The experience of other countries shows that banks need more power to recover loan without court order and taking recourse to asset management companies is an option for them. The Parliamentary Sub-committee on the Ministry of Finance recently recommended to set up an Asset Management Company (AMC) to solve the problem of sick industries. Earlier, the Task Force on Banking Reform, headed by Professor Wahid Uddin Mahmud, made a recommendation for setting up an AMC. The Asian Development Bank (ADB) also made a similar recommendation a few years back but Bangladesh Bank (BB) disagreed with the proposal. The BB is apparently happy with the ARRA. Some nationalised banks have established loan collection agencies manned with local people having social "influence". These are merely loan collection agents but banks try to project these as AMCs. An AMC is not only for recovery of loan; it is a financial institution which takes over NPL and restructure and refinance it and turn it into a performing loan (PL) and sell it to appropriate and deserving entrepreneurs at home and abroad. Securitisation of NPL is a process to finance the process of funding of activities of AMCs for taking over NPL, and restructuring and refinancing of sick industries. The restructuring and re-financing change the credit quality of a portfolio so that it will be acceptable to the final investors. Securitisation has evolved from its tentative beginnings in the late 1970s to a vital funding source. An AMC is a special purpose vehicle (SPV), alternatively known as a special purpose entity (SPE) or special purpose company (SPC), for reducing the risk of bankruptcy and thereby obtaining lower interest rates from potential lenders through securitisation of NPL. This may be done in collaboration with the original sponsors. The concept of securitisation has been adopted for AMCs more recently from the American financial system. The term 'securitisation' has not been defined as such, but has been used in certain rules, regulations and notifications. The Securitisation Act, 2002 of India defines securitisation as "acquisition of financial assets by any securitisation company or reconstruction company from any originator, whether by raising of funds by such securitisation company or reconstruction company from qualified institutional buyers by issue of security receipts representing undivided interests in such financial assets or otherwise". Asset management companies have been set up in various countries as an answer to the global problem of bad loans. Bad loans are essentially of two types: bad loans generated out of the usual banking operations or bad lending, and bad loans which emanate out of a systemic banking crisis. AMC must look beyond cleaning up banks' balance sheets. One area they may turn their attention to is corporate restructuring by bringing changes in the management or rehabilitation of sick industries in collaboration of promoters. They may also take over and ensure proper management of the borrowers' business by effecting a change in, or takeover of, its management. A case of successful rehabilitation/revival, to which the first measure applies, could add much greater value than, say, seizure & sale action. The right to sell or lease business under the second can be an effective antidote to a recalcitrant management. Together, these two measures have the potential to reconstruct asset. But that will happen only when objective conditions for successful rehabilitation are created. Corporate restructuring invariably needs infusion of fresh funds (debt and equity) and conversion of a part or whole of the borrower company's debt into equity. Reconstructing asset reconstruction will involve making progress on two fronts: one, correcting the balance in case of portfolio auctions; two, facilitating corporate restructuring/rehabilitation and finally, opening up the opportunity for equity upsides. The banking regulators or governments try to bail out the banking system of a systemic accumulation of bad loans which acts as a drag on their liquidity, balance sheets and generally the health of banking. So, the idea of AMCs is not to bail out banks, but to bail out the banking system itself from the burden of NPL and huge amounts of blocked assets for provisioning against bad loan. There are some other reasons of setting up AMCs. The idle production facilities can be used for production of goods and services to contribute to GDP and creation or utilisation of employment opportunity. Bankers lack the expertise to manage companies and run plants and machineries and hence an Asset Reconstruction Company (ARC) would be created to buy up the bad loans and then sell the assets for a profit. The key objectives of an AMC are to unlock the value entrapped in the impaired and non-performing assets and to provide proactive management of the assets through financial restructuring, strategic partnerships, board oversight and provision of growth capital. There is no distinction between wilful and non-wilful defaulters in the Artho Rin Adalat Ain, 2003 (ARAA) or in any other law of the country. Banks file case against all borrowers and there is no scope of considering the role of bank or bankers in creation of NPL. There should be a securitisation act which should have mechanism to guarantee security interest of a secured lender, differentiate between wilful defaulter and the borrower who is unable to make payments on the due dates due to change in market conditions, change in government policy, competition from new technology, power shortages, etc. The proposed securitisation act may have some options of setting up AMCs. For example, a) individual banks may start their own AMCs to takeover their own NPLs, b) some banks may join together to form an AMCs, c) independent AMCs registered under the Companies Act, and d) the central bank may set up an AMC. Establishment of an AMC is easier if it is based on funding by the capital market than by the banks themselves. The AMC can float share in capital market, issue bond and debenture. The government and other agencies can buy those and also encourage others to buy. Bridge financing institutions like ICB and other investment companies may convert their share and underwriting of sick industries to share of AMCs. The function of an AMC is to take over bad loan from banks through any securitisation company and a reconstruction company may acquire financial assets of any bank or financial institution by issuing a debenture or bond or any other security in the nature of debenture. An AMC may take over the management of the sick company and perform the following activities: a) employ experts to run the company, b) inject new fund as capital, c) modernise, balance and expand the facilities of production, d) restructure the company for efficient management, and e) find a buyer/buyers to sell out the company at a reasonable price. AMCs will need policy support from the government, the central bank and financial institutions to function properly and effectively. The writer, a part-time teacher at The Leading University, is pursuing PhD in Open University, Malaysia. He can be reached at e-mail: shah@banglachemical.com