Ways for making AMCs effective
Thursday, 13 August 2009
M S Siddiqui
Non-performing loans (bad loans or NPLs) of the banks in Bangladesh are increasing day by day. This is so, notwithstanding the presence of a strong law namely Artho Rin Adalat (ARA) to recover the NPLs. The law, however, ignores the rights of borrowers to take a defense or explain their grievances. The court also cannot take into consideration the role of banks in creating default loans. Even then, the banks have largely failed to recover their large amount of NPLs.
Banks are now asking for a stronger law. They are also critical of the existing legal system for their failure to recover the NPLs. Banks need more power to recover the loans without court order and they can seek help from the asset management companies (AMCs). Our ARA Act is one-way law for filing cases by banks against the borrowers. It curtails the authority of court to hear from defendant. The 'Arjee' (complaint) placed by banks is a "draft verdict" of the court. There is no effective scope for alternate dispute resolution under this act. There is no ombudsman to listen to the grievances of the borrowers.
In this connection, the parliamentary standing committee on the ministry of finance has recently recommended to set up AMCs to address the issues of sick industries. Earlier, the Task Force on Banking Reform, headed by Professor Wahid Uddin Mahmud, had a one-line recommendation for the AMCs. It is now encouraging to note that the recommendation of parliamentary standing committee has drawn the attention of the stakeholders.
The Asian Development Bank (ADB) also recommended for setting up of AMCs a few years back but the Bangladesh Bank (BB) disagreed then with the proposal as it was happy with existing loan recovery laws.
There are some loan collection agencies in some localities, manned with local people having social "influence", appointed by some state-owned banks. But these are simply collection agents. Banks try to project those as AMCs. Now again, the role of AMCs as an instrument of loan recovery is being projected. But an AMC is not a mere loan recovery agency.
Securitization has evolved since the late 1970s. An AMC company 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 rates of interest from potential lenders through securitization of NPLs. A credit derivative is also sometimes used to change the credit quality of the underlying portfolio so that it may become acceptable to the final investors.
The formation of AMCs under the securitization process will mean the adoption of the concept of securitization that has been the recent experience the American financial system. There it has been described as processing of acquiring financial asset and packaging the same for investments by several investors. The term 'securitization' has not been defined as such. But it has been used in connection with certain rules, regulations and notifications. Under the Securitization Act 2002 in India, the term, securitization, has been defined as "acquisition of financial assets by any securitization company or reconstruction company from any originator, whether by raising of funds by such securitization company or reconstruction company from qualified institutional buyers by issue of security receipts representing undivided interests in such financial assets or otherwise".
The Securitization Act in other countries remains mainly for tackling the growing menace of non-performing assets by the securitization of assets through sales to AMCs, which issue security receipts, cash, share debenture or cash (if payable) to the investors and for the enforcement of security interest by banks and financial institutions. Such acts in different countries have become a good instrument to solve the problem of the non-performing assets without the intervention of the courts.
After the enactment of the Securitization Act in different countries, the wilful defaulters do not have any option to delay the payment under the judicial process or on grounds of human rights. But at the same time, the banks also cannot also recover dues arising out of obligations under underwriting commitments and equity finance by way of sharing subscriptions and shares, acquired by the exercise of option for the conversion of loan into equity.
The legal system in our country are over-burdened with litigations involving the banks and the borrowers. Because of its cumbersome process and procedural delays, costs and expenses involved in litigation are realised through execution of decrees obtained from the court. The banks use to recover all the legal expenses and interest thereon from the borrowers. Even the provisions contained in law for corrective action by way of review and appeal against judgements of the trial courts, are branded as causes for the delay for recovery of loans from the defaulting borrowers.
AMCs or ARCs sometimes are confused as money recovery instruments but one of their major works is to re-construct a company. AMCs have been set up in various countries as an answer to the global problem of bad loans. Bad loans are essentially of two types: loans generated out of the usual banking operations or bad lending, and loans emanating from a systematic banking crisis. The problem must be looked into, as operations beyond cleaning up banks' balance sheets. One area, to which they may turn their attention, is corporate restructuring by changing management or rehabilitating sick industries in collaboration with promoters. It may also take over, and ensure proper management of the borrowers' business by effecting a change in, or takeover of, management.
AMCs have two measures, which can be powerful tools in their hands for tackling the difficult, going-concern cases. A case of successful rehabilitation/revival, to which the first measure applies, could add much greater value than, let us say, seizure & sale action. The right to sell or lease business as the second measure can be an effective antidote to a recalcitrant management.
Together, these two measures have the potential to reconstruct asset reconstruction. 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 will involve making progress on two fronts -- correcting the balance in case of portfolio auctions and facilitating corporate restructuring/rehabilitation before finally opening up the opportunity for equity upsides.
There is no distinction between wilful and non-wilful defaulters under this act or under any of its rules. Banks use to file cases against all borrowers and there is no scope for considering the role of banks or bankers in creation of NPLs. The Securitization Act should have mechanism available to the secured lenders for the enforcement of the security interest held by them, address the matters of difference between willful defaulters and the borrowers who are unable to make payments on the due dates due to change in market conditions, regardless of the intentions or the reasons leading to such defaults like changes in government policy, competition from new technology, power shortages.
The banking regulators or governments try to bail out the banking system out of a systematic accumulation of bad loans. Such loans act as a drag on their liquidity, balance sheets and generally their health. The idea of AMCs is not to bail out banks, but to bail out the banking system, from the burden of NPLs and the huge blocked assets due to provisioning against bad loans. These have two effects on profitability of banks though loss of interest earnings on bad loans and reduction of capital for further investment.
There are some other reasons for setting up AMCs. The idle production facilities can be used for production of goods and services to contribute to gross domestic product (GDP) and for creation or utilisation of employment opportunities. Some assets many have plants that employ workers; these would have to be run by the new owners until they find interested buyers. Bankers may lack the expertise to manage companies and run plants and machineries. Here, the AMCs or ARCs can be created to buy up the bad loans and then sell the assets for a profit.
The key objectives of the AMCs are to unlock the value entrapped in the impaired and non-performing assets and to provide pro-active management of the assets through financial restructuring, strategic partnerships, board oversight and provision of growth capital. They need to aim at incorporating the best practices for the resolution of assets to play a pioneering role in securitization of distressed debts since such works are carried out under the close watch of government and under strict regulated environment. AMCs can also provide consulting services to banks/financial institutions for the resolution of their NPLs that remain on their balance sheet.
The writer is a part-time teacher in Leading University and can be reached at
shah@banglachemical.com
Non-performing loans (bad loans or NPLs) of the banks in Bangladesh are increasing day by day. This is so, notwithstanding the presence of a strong law namely Artho Rin Adalat (ARA) to recover the NPLs. The law, however, ignores the rights of borrowers to take a defense or explain their grievances. The court also cannot take into consideration the role of banks in creating default loans. Even then, the banks have largely failed to recover their large amount of NPLs.
Banks are now asking for a stronger law. They are also critical of the existing legal system for their failure to recover the NPLs. Banks need more power to recover the loans without court order and they can seek help from the asset management companies (AMCs). Our ARA Act is one-way law for filing cases by banks against the borrowers. It curtails the authority of court to hear from defendant. The 'Arjee' (complaint) placed by banks is a "draft verdict" of the court. There is no effective scope for alternate dispute resolution under this act. There is no ombudsman to listen to the grievances of the borrowers.
In this connection, the parliamentary standing committee on the ministry of finance has recently recommended to set up AMCs to address the issues of sick industries. Earlier, the Task Force on Banking Reform, headed by Professor Wahid Uddin Mahmud, had a one-line recommendation for the AMCs. It is now encouraging to note that the recommendation of parliamentary standing committee has drawn the attention of the stakeholders.
The Asian Development Bank (ADB) also recommended for setting up of AMCs a few years back but the Bangladesh Bank (BB) disagreed then with the proposal as it was happy with existing loan recovery laws.
There are some loan collection agencies in some localities, manned with local people having social "influence", appointed by some state-owned banks. But these are simply collection agents. Banks try to project those as AMCs. Now again, the role of AMCs as an instrument of loan recovery is being projected. But an AMC is not a mere loan recovery agency.
Securitization has evolved since the late 1970s. An AMC company 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 rates of interest from potential lenders through securitization of NPLs. A credit derivative is also sometimes used to change the credit quality of the underlying portfolio so that it may become acceptable to the final investors.
The formation of AMCs under the securitization process will mean the adoption of the concept of securitization that has been the recent experience the American financial system. There it has been described as processing of acquiring financial asset and packaging the same for investments by several investors. The term 'securitization' has not been defined as such. But it has been used in connection with certain rules, regulations and notifications. Under the Securitization Act 2002 in India, the term, securitization, has been defined as "acquisition of financial assets by any securitization company or reconstruction company from any originator, whether by raising of funds by such securitization company or reconstruction company from qualified institutional buyers by issue of security receipts representing undivided interests in such financial assets or otherwise".
The Securitization Act in other countries remains mainly for tackling the growing menace of non-performing assets by the securitization of assets through sales to AMCs, which issue security receipts, cash, share debenture or cash (if payable) to the investors and for the enforcement of security interest by banks and financial institutions. Such acts in different countries have become a good instrument to solve the problem of the non-performing assets without the intervention of the courts.
After the enactment of the Securitization Act in different countries, the wilful defaulters do not have any option to delay the payment under the judicial process or on grounds of human rights. But at the same time, the banks also cannot also recover dues arising out of obligations under underwriting commitments and equity finance by way of sharing subscriptions and shares, acquired by the exercise of option for the conversion of loan into equity.
The legal system in our country are over-burdened with litigations involving the banks and the borrowers. Because of its cumbersome process and procedural delays, costs and expenses involved in litigation are realised through execution of decrees obtained from the court. The banks use to recover all the legal expenses and interest thereon from the borrowers. Even the provisions contained in law for corrective action by way of review and appeal against judgements of the trial courts, are branded as causes for the delay for recovery of loans from the defaulting borrowers.
AMCs or ARCs sometimes are confused as money recovery instruments but one of their major works is to re-construct a company. AMCs have been set up in various countries as an answer to the global problem of bad loans. Bad loans are essentially of two types: loans generated out of the usual banking operations or bad lending, and loans emanating from a systematic banking crisis. The problem must be looked into, as operations beyond cleaning up banks' balance sheets. One area, to which they may turn their attention, is corporate restructuring by changing management or rehabilitating sick industries in collaboration with promoters. It may also take over, and ensure proper management of the borrowers' business by effecting a change in, or takeover of, management.
AMCs have two measures, which can be powerful tools in their hands for tackling the difficult, going-concern cases. A case of successful rehabilitation/revival, to which the first measure applies, could add much greater value than, let us say, seizure & sale action. The right to sell or lease business as the second measure can be an effective antidote to a recalcitrant management.
Together, these two measures have the potential to reconstruct asset reconstruction. 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 will involve making progress on two fronts -- correcting the balance in case of portfolio auctions and facilitating corporate restructuring/rehabilitation before finally opening up the opportunity for equity upsides.
There is no distinction between wilful and non-wilful defaulters under this act or under any of its rules. Banks use to file cases against all borrowers and there is no scope for considering the role of banks or bankers in creation of NPLs. The Securitization Act should have mechanism available to the secured lenders for the enforcement of the security interest held by them, address the matters of difference between willful defaulters and the borrowers who are unable to make payments on the due dates due to change in market conditions, regardless of the intentions or the reasons leading to such defaults like changes in government policy, competition from new technology, power shortages.
The banking regulators or governments try to bail out the banking system out of a systematic accumulation of bad loans. Such loans act as a drag on their liquidity, balance sheets and generally their health. The idea of AMCs is not to bail out banks, but to bail out the banking system, from the burden of NPLs and the huge blocked assets due to provisioning against bad loans. These have two effects on profitability of banks though loss of interest earnings on bad loans and reduction of capital for further investment.
There are some other reasons for setting up AMCs. The idle production facilities can be used for production of goods and services to contribute to gross domestic product (GDP) and for creation or utilisation of employment opportunities. Some assets many have plants that employ workers; these would have to be run by the new owners until they find interested buyers. Bankers may lack the expertise to manage companies and run plants and machineries. Here, the AMCs or ARCs can be created to buy up the bad loans and then sell the assets for a profit.
The key objectives of the AMCs are to unlock the value entrapped in the impaired and non-performing assets and to provide pro-active management of the assets through financial restructuring, strategic partnerships, board oversight and provision of growth capital. They need to aim at incorporating the best practices for the resolution of assets to play a pioneering role in securitization of distressed debts since such works are carried out under the close watch of government and under strict regulated environment. AMCs can also provide consulting services to banks/financial institutions for the resolution of their NPLs that remain on their balance sheet.
The writer is a part-time teacher in Leading University and can be reached at
shah@banglachemical.com