Published in The Daily Star on Sunday 1 December 2019
While Bangladesh is feted for being one of the fastest growing economies in the world with a growth rate of 8.13 percent in fiscal year 2018-19, its banking sector is in the grip of despair. All major parameters of the banking sector indicate its persistent fragility. Reforms in the banking sector have not been in sight for long, even though the sector has been grappling with huge governance crisis for more than a decade or so. Needless to say, that as Bangladesh prepares for graduation from a least developed country to a developing country and from a lower middle-income country to an upper middle-income country, it has to prepare for a sound financial system which will provide seamless access to finance for development. Regrettably, the policymakers seem to be unwilling to comprehend the headwinds of the banking problems and take up the required reform agenda.
Recent data reveal that the amount of non-performing loans (NPLs) has touched Tk 116,288 crore in September 2019. This is equivalent to 11.99 percent of the total outstanding loans in banks. And, NPLs are clearly not a problem of the state-owned banks only. It is also a serious problem in the private commercial banks. Additionally, as of June 2019, loans worth Tk 54,464 crore were written off. The opportunity cost of this money is huge for a poor country like Bangladesh. If this was allocated for social protection, the annual budget of all social safety net programmes in Bangladesh (except pension for government officials) could be doubled.
In the midst of such a non-stoppable practice of loan default, Bangladesh Bank issued a circular on May 16 announcing that defaulters would be allowed to pay only a 2 percent down payment and loan repayment period will be 10 years, with a one-year grace period. Moreover, rescheduled loans were to be repaid at only 9 percent interest rate, which falls in the range of the lowest interest rate in the country. Bad borrowers getting longer time to repay loans than good borrowers is baffling as it clearly encourages the perverse behaviour of borrowers.
While the banking sector is saddled with huge amount of NPLs, it has been reported that recently, the Asian Development Bank has proposed to the ministry of finance to reduce NPLs through forming a public asset management company (PAMC). The finance ministry is also reported to have informed the media that the government would formulate a special law to set up such a PAMC so that the PAMC can purchase NPLs from banks and sell those off to individuals or corporate entities.
The use of AMCs to solve distressed assets of banks is a common practice in the financial world. However, the formation of a PAMC for reducing NPLs in Bangladesh raises a few questions. Do we have the pre-conditions which should be in place in order for the AMC to function? Are we willing to create an enabling situation for the PAMC to function? We forget that the fundamental problem of Bangladesh’s banking sector is the total absence of governance and that the problems are structural in nature. So the first and foremost requirement is to ensure that there is a strong government commitment for comprehensive reforms to strengthen institutions and ensure public accountability.
Also, functioning of the AMC has to be backed by a strong legal framework. Unfortunately, Bangladesh’s banking sector, in its current situation, is not only a source of crony capitalism but is also guided by outdated and dysfunctional legislation. There is no law for distressed asset take over, restructuring and additional collateralisation by banks when borrowers default. Hence, in the present context, an AMC could create more problems for the banking sector instead of solving the existing ones.
Moreover, in operationlising a PAMC, the government has to inject an initial equity which acts as the working capital for the company. Evidences of many countries suggest that the initial capital provided to an AMC by the government is rarely recovered. This is usually considered as the sunk cost of the crisis that is borne by the government. It is to be seen what will be the amount of this cost in case of Bangladesh.
It is important to understand that the PAMC is not a magic wand for reducing NPLs. Because an AMC does not function in isolation and the solution through AMC is not straight-forward. Setting up and operation of a PAMC is expensive. Therefore, such a company should only be established if the above-mentioned preconditions are met.
The other issue is that of potential investors. Which individuals and companies will invest in the PAMC? Local or foreign? Can the authorities guarantee a transparent process in case of local investors? Do local investors have experience and corporate governance? Which foreign investors will come forward? When foreign investment in the capital market and banks of Bangladesh is not encouraging, then how much interest will foreign investors show to invest in the PAMC? We have seen global private equity firms such as the Carlyle group playing an important role in salvaging distressed asset-burdened banks in countries such as China, India and South Korea. Can our PAMC attract Carlyle or similar companies to rescue our banking sector? Can our policymakers give them confidence?
Without resolving the above issues, the idea of PAMC is like old wine in a new bottle.
Dr Fahmida Khatun is the Executive Director at the Centre for Policy Dialogue.