Govt mulls AMC to cut NPLs

The government is actively considering formation of an asset management company (AMC) to resolve a rise in non-performing loans (NPLs) in banks and financial institutions.

Financial institutions division senior secretary Md Ashadul Islam said AMC is in their agenda as an alternative to resolving NPLs.

"Many countries have been benefited from an AMC," he said, "as it is not only an option, but also a very effective tool to reduce NPLs."

Mr Islam said this at the inauguration of a two-day seminar styled 'Resolving Nonperforming Loans Puzzle: Learning from International Experiences' on Tuesday.

The Asian Development Bank (ADB) is hosting the event at a city hotel.

Arijit Chowdhury, additional secretary of the same division, said they have initiated to update laws and introduce new policies, including formation of an AMC.

He hinted at visible results within the next two to three months.

ADB country director Manmohan Prakash said Bangladesh's economy has showed robust growth and is expected to do so in future.

"However, the high level of NPLs can impair banks' credit intermediation function and pose risks to economic growth and financial stability," he cited.

Mr Prakash said empirical researches on NPLs in Asia and Europe show NPLs play a significant role in credit market frictions and macro-financial vulnerability, adversely affecting economic performance and unemployment.

"Shocks to the banking system that hamper the sector's functions resulted in freezing credit channel and slowing down economic activities."

"In extreme cases, such episodes can lead to a surge in unemployment rate and poverty incidence," he observed.

The 1997-98 Asian Financial Crisis, the 2008 Global Financial Crisis, and the recent European Sovereign Debt and Banking Crisis are grim reminders of impacts of troubled banking system and distressed debts.

Mr Prakash said it is, therefore, a key challenge for the local banking sector to implement adequate measures to effectively address the problem of high NPLs.

Over the years, he said, the authorities have implemented various reforms to improve NPL situation, including adoption of prudential norms in banking and international standards of loan classification and provisioning.

"These reforms will lead to improvements, but we can also look for alternative measures, based on international best practices, which experts will discuss with you in this workshop."

Mr Prakash said each economy faces different conditions that must be considered to develop NPL resolution mechanisms.

"A careful and thorough analysis on legal and institutional framework, financial market and infrastructure development, and fiscal situation should be the basis for preparing NPL resolution mechanisms."

Junkyu Lee, ADB chief of Finance Sector Group, presented a keynote paper, highlighting NPL management and resolution process in neighbouring counties.

On the sidelines, Mr Prakash suggested establishing a state-run AMC to expedite NPL resolution process in the banking sector as other Asian countries have successfully implemented such framework.

After taking over the NPLs and repacking those, AMC can sell those in the market at more realistic prices to encourage banks to expedite the reticulation process.

The ADB also said it would consider financing such AMC, along with its ongoing technical assistance if the government proposes so.

Replying to a query, he said, "We'll be happy if we have such request from government considering its merit. Currently, we're providing technical assistance for the AMC framework."

At the seminar, Bangladesh Bank deputy governor SM Moniruzzaman admitted that NPL is high in SCBs compared to private commercial banks.

Reducing NPL in Bangladesh context is very hard and difficult, he argued.

"Reducing NPL is difficult and it increased in 2019, but we're trying our best. Currently, the net NPL 2.5 per cent and the gross NPL is 11.69 per cent."

"We have witnessed that NPL is SCBs is higher than private banks," Mr Moniruzzaman told the programme.

To make sure that NPLs do not accumulate in the first place, he said, loans should be given only on commercial considerations, and not under administrative or political influences.

Mr Moniruzzaman said the government is considering establishing an AMC.

"We've conducted a fusibility study in this regard and are currently working on legal and other frameworks. But nothing is finalised yet."

ADB's Mr Lee said, "NPL is very much related with macro-economy of a country. Its relation to macro-economy has both positive and negative ways."

"Not that NPL is destructing the entire economy but it is very important to have proper safeguard," he added.

According to Korea Asset Management Corporation (KAMCO), the key challenge for Bangladesh is implementation of financial restructuring, legal framework change and foster market participation to establish an AMC model.

Another Skype presentation by ADB economist Peter C Rosenkranz also suggested forming an AMC.

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