What Thailand can teach Bangladesh about addressing NPLs

In 1996, the Thai economy faced significant challenges, with banks collapsing due to fraudulent activities and a failure to meet projected export targets. It triggered a currency crisis when Bangkok unpegged the Thai baht from the US dollar, setting off a series of currency devaluations and massive flights of capital that affected the neighbouring economies of South-East Asia, which is known as the 1997 Asian financial crisis. 

At that time, the Thai economy was crippled by the problem of nonperforming loans (NPLs), which in 1999 comprised 47.7% of total outstanding loans. In response to this crisis, the government established the Thai Asset Management Company (TAMC) in 2001. The primary objective of TAMC was to acquire and restructure these nonperforming loans. 

The emphasis was placed on revitalising debtor companies, enabling them to repay their debts and recover financial stability. The government required state-owned banks and state-led asset management companies to transfer a significant portion of their NPLs to TAMC. 

Private banks and asset management companies also had an obligation to transfer relatively large multi-creditor loans to TAMC. This comprehensive approach allowed TAMC to restructure debts, reorganise businesses, and manage foreclosure and property disposal as needed.

Importantly, the transferring institutions shared joint responsibility with TAMC for the profit or loss associated with the management of the transferred assets. 

TAMC was mandated to cease its operations in June 2011 and complete its liquidation by June 2013. Over its ten-year existence, TAMC acquired assets with a book value of 780 billion baht, equivalent to approximately $17.3 billion. 

And the NPL ratio in Thailand in 2011 was only 2.7% from 47.7% ten years ago. Today, it stands at 2.67%. 

This is not confined to Thailand alone. Other countries that have effectively reduced their bad loan portfolios through government-level asset management companies include South Korea, China, Indonesia, and Malaysia.

In South Korea, the government established the Korea Asset Management Corporation (KAMCO) and assigned debt management to it. Another government agency, the Korea Deposit Insurance Corporation, was entrusted with recapitalising failing banks by issuing bonds and strictly monitoring the governance of the weak banks. 

Malaysia formed an associate organisation of the central bank called Danamodal to recapitalise the weak banking industry and reform its operations. Indonesia established a similar government organisation named the Bank Restructuring Agency (IBRA). China created four separate asset management companies for its four big banks. 

Thus, it is proven that asset management firms have performed better than other strategies.  And that is also prescribed by the IMF to the Bangladesh Bank to bring down the NPL, which has crippled the country's banking sector and left it bone-dry. 

Bangladesh has managed NPLs well before

One of the conditions of the IMF is to fix the financial and banking sector of the country, and Bangladesh has not been able to do so since. In June 2023, the NPL ratio stood at 10.11%, which is significantly higher than the previous quarter ratio of 8.8%. 

It is not like Bangladesh cannot handle NPL management, as historically, Bangladesh has had a streak of well-managed NPLs. After increasing steadily from 26.09% in 1990 to a peak of 41.11% in 1999, the ratio of NPLs to total loans fell to 31.49% in 2000, 22.1% in 2003, and 13.55% in 2005. 

The ratio hit a record low in 2011 at 6.1%; but not for the best reasons. This happened mostly due to written-off loans, provisioning, and a sharp decline in new bad debt. And that is why it rose again in 2012, when it became 10.0%; and the NPL rose to 9.7 percent at the end of December 2014 from 8.9 percent at the end of December 2013. 

Then, it again declined slightly, to 8.8% in 2015, 9.2% in 2016, and 9.3% in 2017. Then it continued to rise to 10.3% in 2018. Then it began to decrease to 9.32% in 2019 and 7.66% in 2020. 

Then, as the economy began recovering from Covid-19 shocks, NPLs saw a new surge. In 2021, it increased to 7.9 percent. At the end of September, non-performing loans reached a record high of Tk1.34 trillion, or 9.36% of all outstanding loans in the banking industry. 

This year's high NPL ratio is mostly caused by the increase of ratio of gross NPLs to total loans for the State-owned Commercial Banks (SCBs) and Private Commercial Banks (PCBs) to 25.01 percent and 6.46 percent at the end of fourth quarter of FY23, from 19.87 percent and 5.96 percent at the end of third quarter FY23. 

Without taking into account other distressed assets, the volume of NPLs reached Tk1,20,649 crore in 2022, according to the Bangladesh Bank. And in 2023, the number skyrocketed, with the ratio standing at 10.11% in June 2023. 

However, even if there have been some ups and downs in the percentage ratio, when it comes to the total volume of NPL, the volume has not decreased at all except in 2020. Every year, it just piled up, totaling a staggering Tk1,20,655 crore in June 2022. 

And in the next quarter, it jumped to Tk1,34,396 crore at the end of September. And the rescheduled loan amount in 2022 was Tk27,279; if this amount is taken into account, the total amount of defaulted loans would increase to Tk1.60 lakh crore. 

The bad news does not end there. If the IMF method of NPL calculation is adopted, then the total volume of NPL will increase to Tk3,77,922 crore! 

The enduring power of 'willful defaulters'

The Bangladesh Bank has adopted certain aspects of Basel III method into the regulatory framework, albeit with notable exemptions. To gain a comprehensive understanding of the issue at hand, the IMF has instructed BB to move forward by fully embracing the Basel III standards for assessing banks' financial statements and provisions, as well as adopting the International Financial Reporting Standard 9 (IFRS 9); which has not been fulfilled yet. 

Furthermore, instead of establishing a state-run asset management firm to manage NPL and restructure the weak banks, Bangladesh has now taken steps only to identify 'willful defaulters' by amending the Bank Company Act 2023. 

In Bangladesh, willful loan defaulters are people who fail to repay their loans on purpose, or who have the means to repay but choose not to. Furthermore, obtaining a loan in the name of a non-existent organisation or firm by fraud, deception, and false information, obtaining a loan for one purpose and using it for another, or transferring lent money, are all deemed willful defaults.  

Except for India and Pakistan, no other country's laws define the term willful defaulters, as defaulters are defined as someone who fails to return a loan on time. 

In most other countries, the court determines why the loan cannot be paid back. The defaulters must appear in court, and the cases are quickly handled. If a person is declared a defaulter by the court, it becomes difficult for them to live a regular life due to a number of restrictions. And they will almost definitely never be able to obtain another loan. 

But that is not the case in Bangladesh, where loan defaulters lead a lavish life in most cases. This is hurting Bangladesh's financial sector. 

Highlighting the futility of such a distinction between wilful and willful defaulters, Muhammad A. Rumee Ali, former Deputy Governor of Bangladesh Bank and former Chief Executive Officer of the Standard Chartered Bank, said, "whether it is a willful defaulter or an unwillful defaulter, it is a bad debt; it is a non performing asset."

Non performing assets are always a big problem for institutions because they take away liquidity from the balance sheet and lower the income of that particular bank. When we add up all the balance sheets of the economy, we see the total amount of liquidity gone from the market. 

"Willful defaulters or unwillful defaulters do not change the fact on the ground, that this, bad debt has to be turned into performing assets," he added. 

According to the Bank Company Act Amendment 2023, willful defaulters shall not be regarded as eligible for state honours or participation in state functions, and they will be barred from serving on any committee of any professional, business, social, cultural, or political organisation.

If wilful defaulters do not pay the whole amount within two months after receiving the bank's notification, a case can be filed in money loan court. Willful defaulters will be prevented from travelling abroad, registering residences, automobiles, and companies, and serving on political party committees. It also states a provision to publish the names of loan defaulters, much like in India, China, and Malaysia. 

And this is being done to satisfy the IMF condition. However, as with many other laws in Bangladesh, the new act has failed to fulfil its functions at the very onset. The biggest loophole with the law is the case of 'unwillful defaulters', who can take more loans with prior permission from the Bangladesh Bank. 

The act could not prevent Islami Bank from sanctioning a staggering Tk700 crore to the closed mill of AnonTex Group, which is one of the five large borrowers of Janata Bank, and it has been receiving unjust advantages despite making negligible repayment in 13 years. 

AnonTex's liabilities to Janata Bank amounted to Tk7,726 crore by the end of 2022, representing 334 percent of the bank's paid-up capital, much above the state-owned commercial bank's single borrower exposure limit.

And Janata Bank's loan allowed AnonTex to borrow more from the cash-poor Islami Bank, whereas according to the Bank Company (Amendment) Act 2023, an entity cannot get fresh credit if it has defaulted on its loans anywhere. We cannot prevent NPL from rising when the law cannot be enforced. 

Is state-run asset management organisation a viable option?

Now, the question arises - Why is Bangladesh not adopting the state-run asset management organisation to fix the NPL problem? 

Firstly, there is the problem of influential loan defaulters. Influential defaulters have received benefits for a long time. In response to their demand, the definition of default loans was loosened, and the safe period was extended by three months.

Later, in 2015, exceptional benefits were provided to defaulters in the form of loan restructuring, as well as specific discounts for loan write-offs. 

Finally, special consideration was taken to reschedule loans with 2% instalments in 2019. These concessions have resulted in an increase in defaulted loans and an increase in financial fraud. 

Muhammad A Rumee Ali points to another important facet of creating such institutions - that such institutions cannot operate alone. 

"Creating an asset management firm is one way to reduce bad debt, but it cannot operate on an island. It has to be part of a large ecosystem. It can be one part of a larger operation. And in order to create such a firm, we need more regulations and adequate laws," he said. 

Otherwise, the recovered asset will again be a new bad debt, if there is no legal or social justice system. And before we create a state-run asset management firm, we need supporting laws, a supporting regulatory framework, supporting banks who will assist the Central Bank, and social stigma about loan defaulters. 

"At the same time, bank officials have to train their employees on credit and loan recovery," he added. 

That being said, one of the biggest incentives for loan defaults in Bangladesh is the lack of punishment. Even in our neighbouring country, India, it can be seen that loan defaulters like Vijay Mallya or Nirav Modi are chased out as far as London. 

Here in Bangladesh, the loan defaulters are regularly rewarded and given social acceptance and honour. As long as a comprehensive approach - political, financial, judicial, and social combined—is not pursued, the problem of NPLs will be hard to solve.