Bailout package for banks to clean up NPLs

Bailout package is very common with the government or regulatory authorities all over the world. It is undertaken particularly when banks or financial institutions are in trouble with their liquidity shortage resulting from debt problem. The longstanding problem of non-performing loan (NPL) cannot be resolved without adopting special measures like Bailout package. Under this programme special fund will be created for this particular purpose. Bailout package has components: a) Special funding support, and 2) Stringent compliance of terms and conditions.
These two measures are applied simultaneously, otherwise bailout package does not work. Violation of terms and conditions of bailout package is dealt with strongly and no compromise is allowed in this regard. This programme should not be undertaken if all the stakeholders are not ready to strictly comply with the terms and conditions of the package.
RESTRICTION ON THE USE OF BAILOUT FUND: Since special funding support will be provided under a bailout package to help the banks clean up longstanding NPLs, some sort of restriction may be imposed on deployment of fund freed through securitisation or easing-up process. In general, risky investment should be avoided and more precisely, the deployment of fund freed under bailout programme may be limited to only lending against collateral securities in cash. This restriction will, however, not apply to the amount already repurchased or redeemed.
DEALING WITH NON-COMPLIANT BANKS: There is no reason why a bank should fail to comply with the terms of repurchase or redemption, because repurchase or redemption is tied with EBT (Earnings Before Taxes) to be generated by the bank. Loan operation will be streamlined and thereby NPL will be reduced substantially. Besides, the bank will be able to free cash which will fetch additional revenue if invested. Moreover, the burden of provision and income loss on NPL will be removed and thereby banks will be able to increase their profit volume. Subject to minimum management efficiency, banks will be able to generate enough profit required to fulfil repurchase or redemption terms. Nevertheless, if a situation arises whereby a bank fails to generate adequate EBT to satisfy repurchase or redemption criteria, the repurchase or redemption programme will continue as charge of loss in the bank's books of accounts. The bank will be allowed two or three more years to charge losses and within this period, if the bank fails to improve its situation, the ownership of the bank will be taken over by others and will be merged with some other banks or sold out to new investors. This is an extreme situation which is unlikely to arise if minimum compliance is maintained.   
COMPREHENSIVE DEED OF AGREEMENT: Cleaning up longstanding NPL is a massive task requiring long-term measures. During this period, the management, owners, the Governor of the Bangladesh Bank and even the government may change. But this programme must remain unaffected and should continue without any interruption, otherwise, the whole programme will be jeopardised. Keeping this in view, a comprehensive deed of agreement should be executed among the concerned banks, the Bangladesh Bank and the government which will be binding on the present management, Board of Directors and their successors. The deed of agreement will stipulate precise terms and conditions including the repurchase or redemption arrangement and the measures of dealing with any non-compliance. The deed of agreement will be enforceable under relevant/applicable laws and all the parties, including their successor, will be bound to abide by this agreement. Any violation or non-compliance will be dealt with according to the terms and conditions of the agreement.
IMPLEMENTATION THROUGH COMPUTERIsED SYSTEM: The entire process from determining the amount of unrecoverable NPL to repurchase or redemption, should be carried out through an authenticated computerised system. A standard software, preferably a web-based programme, may be developed in order to record, monitor, report and audit the whole NPL cleaning programme. The programme will be designed in such a way that dual control can be established and there will not be any scope of manual manoeuvring. This is required to preventing any attempt from any corner to temper with the facts and figures.
CONTINUING RECOVERY DRIVE:  The special programme of cleaning up longstanding NPL should not immune the banks and financial institutions from persistently continuing efforts to recover NPL. Instead, their recovery drive will not only be in full swing but also be expedited, because the positive result derived from recovery endeavour will help the bank increase its profitability as yearly repurchase or redemption quota is tied up with the amount recovered from NPL.
TASK FORCE OR HIGH-POWERED COMMITTEE: The special programme of cleaning up longstanding NPL is a challenging initiative whose success depends on all stakeholders' firm commitment, sincerity, determination, sacrifice, full support and cooperation. Besides, this will be a long-term project as enormous amount of unrecoverable NPL has accumulated over the last half century will have to be cleaned gradually over the next 20 to 25 years. The success of such a special measure will entirely depend on strict compliance of the terms and conditions of the programme, adherence to the steps described in the executed agreement and proper implementation of the whole programme. Therefore, a high-powered committee with representation from all stakeholders is to be constituted with the responsibility of implementing, monitoring, enforcing and finally, making the project a complete success. The proposed Task Force or High-Powered Committee should comprise of: Representative from the Bangladesh Bank, Representative from the Ministry of Finance, Representative from the Securities & Exchange Commission, Chairman or President of BAB (Bangladesh Association of Banks, i.e., bank owners' forum), Chairman or President of ABB (Association of Bankers, Bangladesh, i.e., bank ex'cutives' forum), Representative from the association of Non-bank Financial Institutions, President of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), a renowned lawyer and a reputed chartered accountant.
The committee may be headed by the Bangladesh Bank representative and will be collectively responsible to the Ministry of Finance and the Bangladesh Bank.
Nironjan Roy, CPA, CMA is a Toronto-based banker.
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