Bringing the financial system back on track

Nironjan Roy | Wednesday, 2 November 2016

The proposed bailout project to clean up accumulated non-performing loans (NPLs) is a very big and challenging one. However, bailout package, securitisation, involvement of Asset Management Companies (AMCs) and easing-up are very common practices in the developed world to help the financial industry overcome the crises over non-repayment of debts. This new concept has been developed based on bailout package, securitisation and easing-up programmes and in the light of our experience regarding the nature of NPL. It may not be possible for the stakeholders to reach a consensus on the issue. Instead, a pilot project may be undertaken on an experimental basis with certain sum of NPL which eventually may be written off. NPL in agricultural credit disbursed among the farmers may be brought under this pilot project. If the pilot project is successful, initiative may be taken to implement the whole project. 
GLOBAL EXPERIENCE: As the debt problem in every country is unique in nature, separate plans should be prepared to manage the issue in each country. 
USA: This country is a good example of overcoming financial crises arising out of so-called subprime mortgages by undertaking massive bailout programmes. With the bailout package and securitisation approach, the sub-prime mortgage problem in USA was resolved; and even debt crisis faced by large banks in North American was overcome with the help of this approach. 
Europe: Financial crises faced by Spanish banks and Portugal's banking system were overcome with the help of both bailout package and easing-up programme resorted to by the European Central Bank (ECB). Ireland overcame its NPL problem with the help of bailout package and support from the State. Italy is now a victim of NPLs and performance of its banks is deteriorating due to high volume of NPLs to an extent that no single bank can tackle the issue with its own initiative and direct assistance from the government is sought in view of skyrocketing NPLs. Keeping this in view, Italian government has decided to set up Bad Bank which is technically an Asset Management Company. Bad Bank will take over NPLs from the banks and help them revive their regular business, including disbursement of new loans. Although the Italian government will not directly inject money under this system but there is a public entity, Cassa Depositi ePrestiti (CDP) which will come forward to help the government in supporting the banking system of the country. It is expected that for the success of Bad Bank mechanism, CDP will provide all necessary support and assistance, including financial aid. However, this plan cannot move fast because of some regulatory restrictions, but the approach is under active consideration. 
China: China is also facing similar problem of fast increasing NPLs as the total amount of bad loans has already reached 19 per cent of the total outstanding loans. The authorities are now greatly worried that any mishandling may weaken the banking system and may lead to systemic financial risks and negative growth. China is reputed for its strong financial system but its banking system with high amount of NPLs cannot perform well any more. So the authority has been actively considering developing some strategies and action programmes to resolve the issue before it goes out of control. 
In this connection, Asset Management Companies (AMCs) have been set up which will take over bad loans from four giant state-owned banks. The AMCs often take over debt which banks agree to buy back later. This kind of NPL treatment has been termed as warehousing of bad loans. The China Banking Regulatory Commission does not support this system as it believes that banks overburdened with NPLs cannot support the economy and therefore many similar alternative approaches, such as swiping of bad loans with equity, securitisation of bad loans etc. are under consideration.   
India: India has been facing a similar problem of persistently rising NPL as 16 per cent of its total outstanding loans have already been identified as distressed loans. The authorities are greatly worried with the situation of rising NPL and is seriously considering some action plans to address this situation. As part of this plan, some banks have already been bailed out by the government. However, the authorities also realised that such sporadic bailout packages will not be a permanent solution for improvement of the overall situation and therefore, consideration is underway to establish institutions to manage NPL. This move, however, cannot proceed further because consensus among the politicians and policymakers cannot be reached. 
MANAGING UNRECOVERABLE NPLS UNDER DIFFERENT SECTORS: Financial industry of our country is run by three different types of financial institutions: (I) State-owned Commercial Banks and Development Financial Institutions (SOCBs and DFIs), (II) Private Commercial Banks (PCBs) and (III) Non-Bank Financial Institutions (NBFIs). The structure, management and practices of these different groups of financial institutions are different in nature. The basic concept and modus operandi for managing the unrecoverable NPLs will be the same, although the arrangement between the parties will be different. Since SOCBs and DFIs are owned by the government, direct intervention from the government will be required and securitisation with repo arrangement or easing-up arrangement will have to be made according to guidelines of the government. PCBs can work out this programme under the guidance of the Bangladesh Bank. The NBFIs are comparatively better off and so they may enter into similar arrangement with commercial banks with good standing. If no bank is found to be interested in the programme, the Bangladesh Bank may have to come forward because it is also an active player in the financial industry.  
NECESSITY OF AMENDING SOME LAWS:  If this special programme is undertaken with a positive approach and measures are taken to implement it, amending certain sections of laws, particularly Bank Company Act and Company Law, may have to be amended.  
NPL is not peculiar to our country and if the problem is not addressed properly, it will gradually ruin the financial system of the country. Once upon a time European banks were considered stronger than those of the USA, but the former have weakened due to high volumes of NPLs. In the middle of this year, all European banks had to undergo stress test, the result of which was revealed on July 29, 2016. Overall performance was not as good as was expected and rising NPL is considered as one of the main problems.  
The NPL situation in our country turned from bad to worse as neither appropriate provisioning nor timely writing-off has been done. As a result, the amount of NPL has assumed ominous proportions. Moreover so-called rescheduling or inappropriate restructuring facility has only helped to hide the problem making the situation more complex. The situation has reached a stage where the bankers can not think of getting rid of NPLs. We should bear in mind that NPL is considered as a cancer cell in the financial industry, which, if not treated properly, cannot be suppressed for a long time and it will once engulf the whole system. NPL will not only deter the growth of the bank but will also jeopardise the entire financial sector. Country's economic growth will also be adversely affected because of it. So time has come to take some drastic action in order to clean up the unrecoverable NPLs. The initiative will have start from a certain point and once the process is on, it will start producing results. In the past, many programmes like FSRP (Financial Sector Reform Programme), LRA (Lending Risk Analysis), CRM (Credit Risk Management) and others have been implemented and some have been successful. So one more special programme may be undertaken with a view to cleaning up the mess of longstanding unrecoverable NPLs and bring our financial system back on track. 
Nironjan Roy, CPA, CMA is a Toronto-based banker.
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