Asset Management Company May Worsen NPL

Introducing an asset management company (AMC) is technically the process of involving an intermediary establishment as a means of addressing a bank’s NPLs.

Some bankers said that Bangladesh Bank (BB) is actively considering the introduction of an asset management company (AMC) with a view to resolving NPL issues. Even the BB governor has informally spoken about applying the concept of AMC for resolving NPLs. AMC is also termed as Vehicle Entity, Bad Bank, Third Party Enterprise, etc.

This vehicle entity takes the ownership of the entire NPL from the bank, enabling it to clean the mess of NPL and thus emerging as an NPL-free bank. Because of getting rid of NPL, the bank’s overall financial position improves, creating the scope for rising business turnover. The bank, which does not carry NPL in their books, can easily conduct domestic and international business on favourable terms and conditions. A bank without NPL can arrange funds at a lower cost for financing cross-border trade and disburse loans at a lower interest rate. If an NPL-free banking system can be ensured, investments are supported, businesses get momentum, employment is generated and finally the country's economy grows.

The ownership structure of AMC may also be in different forms, as this type of entity may be fully owned by the government or collectively held by all commercial banks or under the authority of the central bank. The ownership structure of AMC also varies from country to country and region to region. In the USA, this type of entity is privately owned, while developed countries like Italy and Ireland have established vehicle entities under the authority of their central banks. However, the ownership of AMC must be held by the government in developing countries like Bangladesh.  

When a bank’s NPL persistently rises and at certain point, goes beyond bank’s control leaving the bank’s existence at stake, then applying AMC as third party involvement is required. But instances of applying the concept of AMC towards addressing NPL issues are not wide; rather, they are very limited. Because this is a very sophisticated technique that may function well in the financial sector, which is very efficient, disciplined, well compliant and under strict regulation. Italy has reportedly applied the concept of bad bank towards addressing their NPL problem and has been successful to a great extent. Ireland has also applied the concept of vehicle entity in resolving their NPL problem. Few years back, when India’s banking sector fell into trouble, they also considered applying the concept of vehicle entity, but to what extent this concept has been applied and what is the outcome, are not known to us.

This concept has many limitations, because NPL may rise instead of declining if the concept of vehicle entity is not appropriately applied. Some good loans may purposefully be transferred to the vehicle entity with the ill motive of making AMC a profit-making entity. If this really happens, there is likely a possibility of rising NPL, because passing a good loan from a bank to a non-bank entity may easily turn NPL. Even a bank may go for lending the money freed from transferring NPL to the vehicle entity, and part of the newly disbursed loan may default, which will further raise NPL. So, all these consequences may contribute to rising overall NPL in the country’s banking sector. 

Now a question arises: how will AMC acquire NPL from a commercial bank? Will this entity purchase NPL or will acquire it for temporary retention for a certain period? Regardless of purchasing or temporarily acquiring NPL, the AMC will have to pay an equivalent amount of money to commercial banks. If so, then how will the AMC arrange this enormous amount of funds? Whether the government will provide or AMC will alternatively arrange from the people is a complex situation.  More importantly, how AMC will deal with massive NPL to be acquired from commercial banks. Whether they will drive a special measure for recovering NPL or will write it off after holding it in their books for a certain period. If write-off is needed, then AMC will arrange the fund. Addressing these relevant issues and consequences arising out of improper implementation suggests that the scope of applying the AMC concept in resolving NPL problems is very limited in Bangladesh.

It should be kept in mind that writing off NPL is the only proven solution to NPL problem and this writing off may be done using either provision retained against NPL or from current profit. If provision and current profit are found inadequate, then future earnings may be used to write off the bank’s NPL. Using future earnings towards writing off NPL may require the involvement of AMC or a vehicle entity. However, prior to applying the concept of AMC, some preconditions must be met, and these are (I) banks must be operating as self-regulatory organisations. (II) Good governance must be established, and good compliance and accountability must be ensured. (III) Clear demarcation between the board of directors and Management must be established and strictly followed. (IV) The bank’s credit risk management and loan operation must be completely digitalised. (V) The central bank must have the ability and independence to stringently regulate the financial sector. (VI) A secondary bond market should be established, enabling AMC to mobilise funds at a very low cost.