Authorities set to create Bad Loans Bank
The Treasury with line ministries are gearing to create an Asset Management Company (Bad Loans Bank) or non-performing loan (NPL) bank to take over the toxic assets of the banks, and ring-fence these assets for the banks to move forward.
Ministry of Finance officials said that this was approved by the last budget, but progress was very slow. Now the discussions are at the initial stages and the bad bank is envisioned with supporting recovery powers legislated by Parliament, and with all conceivable powers, including those of the banks to recover the toxic assets of the banks. It will assist finance companies and their investors in providing funding support to banks and companies for business operations to safeguard and promote 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 NPL portfolio will be sold at a discounted rate. The Central Bank said that the NPL ratio at the end of 2022 was at 11.3 per cent, which increased to 12.7 per cent in Q1 2023 and to 13.3 per cent by May.
At the Chartered Financial Analyst CEO Forum in July in Colombo, HNB Managing Director Jonathan Alles said, that the idea of the bad loan bank is a good one. “But we have been discussing this for the past decade. We need to set objectives on what we are trying to achieve with such a bank. We can take a phased approach and decide on what is important to Sri Lanka. This could be an avenue to park, banks’ bad lending or bad decision-making.” Mr. Alles mentioned that a bad loan bank will free up capacity in the good banks and let them continue to do good long-term transactions such as project financing infrastructure. “Then these banks will not only be confined to lending collateralised debt only.”
Analysts said that with the level of impact impairment that Sri Lankan banks are facing, the country needs a bad bank. They added that Sri Lanka can take lessons from Malaysia’s Danaharta established in 1998 to remove nonperforming loans from the financial system and maximising their recovery. The Danaharta Act granted the agency special legal authority to more efficiently resolve NPLs.
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