ADB to help fight bad loans

Asian Development Bank is poised to provide financial support to the government to form a public asset management company (PAMC) with a view to arresting the upward trend of defaulted loans.

A PAMC purchases non-performing loans (NPLs) from banks and sells them off to individuals or corporate entities. The company will take the NPLs off banks’ hands in exchange for special bonds that would have certain maturity, enabling lenders to keep provision for bad loans.

“We will be happy to provide financial support along with the existing technical cooperation if the agency receives proposal from the government,” said Manmohan Parkash, country director of the Manila-based development lender, yesterday.

Asset management companies (AMCs) played a critical role in bringing down non-performing loans (NPLs) in different countries, especially the nations that faced the Asian financial crisis between 1997 and 1999, he said at the opening session of a two-day conference.

The ADB organised the conference styled “Resolving Nonperforming Loans Puzzle: Learning from International Experiences” at the Le Méridien hotel in Dhaka.

Bangladesh has been maintaining a robust growth in recent years, but the high NPL is a major challenge for the economy, Parkash said.

The outcome from the ongoing conference will help reduce the NPLs and the ADB is fully committed to ensuring a sustainable Bangladesh, he said while delivering his opening remarks.

NPLs in the banking sector stood at Tk 112,425 crore as of June this year, up 20 percent from six months ago.

Speaking at the concluding ceremony, Md Ashadul Islam, senior secretary of the financial institutions division, said the government is very positive about forming a PAMC.

The government is mulling over taking different initiatives, including legal reforms of major pertinent laws and creating a PAMC as an alternative NPL resolution mechanism, said Mohammad Ashfaqur Rahman, a joint director of the Bangladesh Bank, in the opening session.

He presented a paper on “NPL Resolution Mechanism and AMC: Bangladesh Scenario” at the conference. A feasibility study aimed at establishing the PAMC has already been conducted by the central bank, he said.

A joint committee comprising officials from the finance ministry and the central bank has been formed. The committee, headed by Md Shukur Ali, a joint secretary to the financial institutions division, has revisited the feasibility report and is working on the legal, institutional and operational framework of the proposed PAMC.

The central bank started working on a PAMC at the beginning of 2019 when it carried out an extensive analysis of seven Southeast Asian countries on how they had brought down their large amounts of NPLs after the Asian financial crisis.

In order to make vibrant the PAMC, a secondary market for NPLs will be needed, where people would be allowed to buy and sell default loans. A special AMC act will be needed to function properly, said Rahman.

Junkyu Lee, chief of the financial sector at the ADB, while presenting a keynote paper on NPL resolution mechanisms, said an increase in NPLs leads to a reduction in credit supply and a rise in unemployment and slowdown in overall economic activity.

NPL shocks from one country can cross into other countries through micro financial linkage, he said.

Referring to the Asian financial crisis, he said not only the AMCs were useful in resolving NPLs of the banking sector in the crisis-hit nations, the legal and regulatory environment created to facilitate operations of these companies aided in fostering NPL markets that did not exist before the crisis.

Nine Asian countries – China, Indonesia, Japan, Kazakhstan, Malaysia, the Philippines, South Korea, Thailand, and Vietnam – pulled off tremendous success in bringing down their NPLs by creating PAMCs.

The role of AMCs and NPL trading platforms should be considered to develop NPL markets, Lee said.

Arijit Chowdhury, additional secretary to the financial institutions division, said the government is working on various legal reforms to tackle defaulted loans.

“Reducing NPLs is not an easy task. It is complicated. The conference will help explore new models to arrest the NPLs,” said SM Moniruzzaman, deputy governor of the central bank.