CB to model a 'bad loan' company

The Central Bank ( CB) will include a Financial Asset Management Company (FAMA) in its company resolution framework to recover bad loans from errant borrowers, officials said.

This will assist banks and finance companies to recover and manage their Non- Performing Loans ( NPLs). “Essentially it’s a ‘ bad bank’ that will purchase defaulted loans from banks/ finance companies to sell to retail and corporate investors,” a CB official told the Business Times.

A similar system was announced in the Government Budget 2016, but that’s now in the backburner, Treasury officials said. “The legal framework is the hardest part. The CB will form two separate laws – one for a FAMA for banks and the other for finance companies,” the CB official explained. In the longer term, there may be a common law, he added. There needs to be an enabling framework for asset recovery and resolution, an effective legal system and a reliable financial regulatory and supervisory framework, he noted.

He said the laws will grant parate execution powers to the FAMA. “It’s important to introduce legal and judicial reforms to enhance ef ficiency in court- driven insolvency process,” he said.

The CB is perusing FAMA models in East Asian countries such as Malaysia. Malaysia’s default loan recovery rate is at 58 per cent (low) owing to Malaysia’s Danaharta which manages and rehabilitees the financially troubled companies in Malaysia.

The CB will assist finance companies and their investors to provide funding support to banks and companies for business operations in the interest of safeguarding and promoting the banking and non- banking financial sector as a whole. In this process, there will be an assessment of bank loans to large borrowers which will lead to a reclassification of loans. The NPLs portfolio will be sold at a discounted rate.

A major overhaul of the re gulatory framework to strengthen the safety and soundness of the sector as a whole is also an essential component in this process, the official added.

The FAMA is a main component of the deposit resolution framework that helps to identify such weak institutions and before they go bankrupt, to find the modalities of paying the depositors. It will improve the legal and institutional environment for NPL resolution and to facilitate acquisition and disposal of NPLs which will develop NPL markets.

Recognising the need for a dva n c e d planning, the appropriate recovery and resolution plans for banks and finance companies whose feasibility and credibility is critical, he said.