Preparing comprehensive plan to deal with NPLs

Some loans turned non-performing in the 80s and 90s of the last century or even prior to that and are being carried over in the bank's books. There is no justification of carrying over these bad loans for decades together.
Bank's books of accounts should present a clean picture which is not possible carrying enormous amounts of non-recoverable NPLs. There is a need for a comprehensive plan to get rid of the burden.
First of all, the entire portfolio of NPL should be thoroughly reviewed, analysed and categorised. Initially the following categories may be considered:
a. NPL without the existence of borrower, business and realisable collateral security.
b. NPL without the existence of borrower and business but with realisable collateral security.  
c. NPL with the existence of borrower and business as well.  
d. NPL with the existence of borrower without business.  
e. NPL with the existence of borrower but engaged with other active business.  
NPLs without the existence of borrower, business and realisable collateral security were possibly disbursed under political pressure or through manipulations by unscrupulous bank employees. This is the riskiest form of loans which is beyond recoverable stage. The entire portfolio of this kind of loan will have to be written off or wiped out from the bank's records because there is no justification of retaining this kind of bad loans in the bank's book so that the entire loan amount is classified as unrecoverable and steps will have to be taken to eliminate it.   
As for NPLs without the existence of borrower and business but with realisable collateral securities, the distressed value of the realisable collateral securities will have to be estimated first and then  deducted from this category of NPL to determine the total amount of unrecoverable NPL under this category. This unrecoverable loan will need to be written off or removed from the bank's books. At the same time expeditious measures will be required to dispose of the collateral securities and in this connection, the fastest method has to be developed with the help of the government. Prolonged legal process should be avoided and direct sale by the bank to the potential buyer may be considered.
NPLs with the existence of borrower and business as well arise as a result of misunderstanding between the borrower and the banker. Improper way of structuring loan having inconsistence with cash-flow or mismatching of short-term and long-term loan also result in this type of NPL. This kind of NPL can be reversed to good loan if proper analysis can be done and appropriate negotiation with the borrower can be carried out. There will not be any need to write off the same. Only proper monitoring, support and good relations with the borrower are required to keep this loan in good health.
NPL with the existence of borrower without business may be the result of wrong lending decision. However, economic recession, industry impact and management failure may be the main reason behind this type of NPL. Elaborate analysis and discussion with the borrower will be needed in order to ascertain whether he is capable enough and still has the potentiality to rejuvenate his business operation. If his potentiality is found viable, then bank should continue this loan and extend support to the borrower to generate his cash-flow.  However, if the borrower is found to have no further potentiality, capability and opportunity, the distressed value of the realisable collateral security should be estimated and deducted from the outstanding NPL in order to determine the unrecoverable NPL amount.
NPL with the existence of borrower but engaged with other active business arises when fund is diverted from one unit of the borrower's business to another. This situation may arise when the concerned business unit against which loan was disbursed does not perform well but the borrower's other business entities are doing well. The cash flow generated from the borrowing entity is not good enough for debt servicing and therefore the loan has become a non-performing one.  This category of NPL can be treated with appropriate application of loan restructuring policy. The loan restructuring policy may well equip the bankers to provide the borrower with affordable debt servicing opportunity. Under this policy the entire outstanding loan of the non-operating or under-operating business unit will have to be set aside and converted into term loan with long expiry so that monthly instalment size becomes consistent with the cash-flow generated by the borrower's existing business operation. Other business units of the borrower need to be kept running with full support and cooperation from the bank so that cash-flow generation remains intact and if needed, increased cash-flow can be generated to repay the instalments of restructured loan. It may, however, be mentioned here that in order to recover the bank dues, efforts should always be underway to help the borrower sustain his business operation and thereby continue to generate adequate cash-flow. If appropriate measures are taken, it will not be necessary to write off this category of NPL for regularisation.  
DETERMINING THE AMOUNT OF UNRECOVERABLE NPL: Total amount of unrecoverable NPL should be determined through in-depth analysis and taking all the available means of recovery into consideration. The only option then is to remove or eliminate this portion of NPL from bank's books of accounts.
Writing off is the only accounting standard for charging NPL, but provision was not made properly and even writing-off of NPL was not done over the decades. As a result, enormous unrecoverable NPL has been accumulated and no bank can afford to entirely write off the unrecoverable NPL. Therefore special programme or scheme will be required with intervention of the government and the Bangladesh Bank.
SECURITIsATION WITH REPO ARRANGEMENT: Securitisation with repo arrangement and easing-up are two commonly used approaches to help the commercial banks to bail out when problem arises over liquidity crisis or debt crises. Under securitisation, the banks or financial institutions convert their assets (loans) into security to be sold to the government, regulator or other investors. Under easing-up approach the regulator or government body buys the bond created by commercial banks or financial institutions. In securitisation, there is a buy back arrangement while under easing-up process, the bond will be redeemed to the selling banks.
The entire NPL which is determined as unrecoverable will be converted into Assignable Securities at prevailing bank rate or any other concessional rate allowed by the Bangladesh Bank. These assignable securities will be sold out to either the Bangladesh Bank or the government with repurchase guarantee by the selling bank. Every year the bank will buy back certain amount as per agreed terms and conditions and will eliminate/write off immediately. Bank rate or any agreeable rate should be applied in determining the stream of buy back amount like annuity payment. This process is known as securitization with repo arrangement.
EASING-UP APPROACH: Under this approach, each bank will issue redeemable coupon bond equal to the amount of non-recoverable NPL at prevailing bank rate or any other concessional rate allowed by the Bangladesh Bank and the government or the Bangladesh Bank will buy those bonds. The sale proceeds of these bonds will be utilised to write-off non-recoverable NPL. This approach of issuing bond and selling thereof to the regulator or the government to free cash is known as Easing-up approach. These bonds will be redeemed to the selling bank as per predetermined schedule and will then be eliminated or removed from the books of account as writing off measures.  
REPURCHASE/REDEMPTION PROCESS: In both the cases the memo account will need to be created to record these assignable securities or redeemable bond and full disclosure will be provided in the Financial Statement of the Bank.
This will, however, not immune the bank from their recovery drive to realise NPL. Instead vigorous measures will remain underway to expedite the legal process or other applicable means as may be deemed necessary for recovering the loan and disposing of the realisable collateral security.
Every year Bank will use either the entire amount of recovered NPL if any or 50 per cent of its EBT (earning before tax) or Tk.1000 million,  whichever is higher, to buy back the Assignable Securities or bond to write off the buy-back/redeemed amount immediately. The amount to be used to buy back assignable securities will be treated as expenses. This buy back or redemption will be done twice in a year i.e. after every half yearly and annual account closing. This process will continue till the entire amount of assignable securities or redemption of bond is completed and writing off process ends. This will not however apply to any newly created NPL as this will be written off immediately after identification.  
Nironjan Roy, CPA, CMA is a Toronto-based banker.
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