The government now plans to set up a state-run corporation to buy and trade distressed loans off banks as part of its efforts to clean up the financial sector.
The planned Bangladesh Asset Management Corporation (Bamco) would be run as a state-run entity by the Financial Institutions Division under the finance ministry.
The government had initially planned to set up a company to deal with the mounting default loans in the financial sector.
The division has prepared a draft of the Bangladesh Asset Management Corporation Act 2020(Bamco) to this effect.
The authorised capital of the planned corporation would be Tk 5,000 crore and the paid-up capital would be Tk 3,000 crore. A 15-member board led by a chairman would run it.
The corporation would set up a trading platform to buy and sell default loans and create a competitive market to trade distressed assets. It would be able to raise funds from the capital market by issuing bonds.
Despite several measures in Bangladesh, including the implementation of prudent measures in the banking system in 1990 and loan classification and provisioning with the international standards, the default loans in the banking system are still very high, according to the Asian Development Bank.
Defaulted loans stood at Tk 94,313 crore at the end of 2019, up 0.42 per cent year-on-year.
As of last year, reported default loans approached 9 per cent, with state-run commercial banks' bad loans reaching 24 per cent, the International Monetary Fund (IMF) said recently.
The planned Bamco would take control of the assets of the defaulted individuals or firms, manage them and advise lenders to manage and recover defaulted loans as well as advise borrowers.
If a borrower becomes sick, the corporation would stand by it. It would work as a government receiver if a borrower firm goes bankrupt, according to the draft act.
The draft act would be sent to the public administration ministry this month.
After approval by the cabinet and vetting by the law ministry, it would be sent to parliament to turn into law.
The status of the Bamco chairman would be equal to a deputy governor of the central bank.
The rest 14 directors would consist of a senior official of the finance division, the financial institutions division, the commerce ministry, the Bangladesh Bank, the Bangladesh Investment Development Authority, the Insurance Development and Regulatory Authority, the National Board of Revenue and the Financial Reporting Council.
A certified accountant or financial analyst, an academic from a finance department of a university, a representative from the Attorney General Office, the Association of Bankers Bangladesh and the Federation of Bangladesh Chambers of Commerce and Industry would also be on the board.
The corporation would be empowered to sign an agreement with local and foreign banks or financial institutions and all defaulted loans of banks, financial institutions and specialised banks that have taken licences from the central bank would be under the coverage of the corporation.
It would be headquartered in Dhaka and would be able to open offices in any part of the country and abroad. The corporation would be able to set up subsidiary companies.
The decisions of Bamco would be final. The aggrieved individual or firm would be able to appeal to the board for reconsideration. However, they would not be able to sue Bamco before appealing.
The corporation would ink deals with banks to realise the defaulted loans that the lenders themselves would fail to recover. In exchange, it would get a portion of the realised money, the draft act said.
If Bamco assumes that a defaulted firm can make a turnaround if changes are made to the management, it would bring in the change. It would be able to sell off the assets of the defaulted companies.
The tenure of the board would be three years and the directors can't continue for more than two terms at a stretch.
The incomes or profits of the corporation would enjoy the tax holiday initially for 10 years.
Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, however, said it would be a loss-making corporation.
"The weakest banks would use it to dump their bad assets and put the burden on the government. Why should the government take this responsibility? Why should the public sector take responsibility for the bad debts of the private sector?"
The government's track record in asset recovery is absolutely horrendous, he said.
Citing the example of scams related to Jubok, Hall-mark and Destiny, Mansur said the companies have become non-existent but the government got nothing in terms of assets.
"At least I don't know whether the government has got anything because no such information is available."
The former official of the IMF recommended allowing setting up of private asset management companies with the government providing legal assistance.
Private sector companies would be able to buy distressed assets at market prices or much lower prices compared with the planned corporation. And banks would not run to dump their bad assets onto the public asset management companies (PAMCs), he said.
In many countries, PAMCs have been successful, he said.
But there is governance structure and integrity of the people and the overall system in those countries and there is no formalisation of corruption there.
"I strongly urge the government not to go for the corporation because it would simply assume the responsibilities of the default loans of all the banks at taxpayers' money. The government should not impose this burden on the people," Mansur added.