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Value Maximization of Non-Performing Loans (NPL) and Distressed Assets – Pakistan’s Experience (October 1999 – October 2003). Salman Ali Shaikh. The composition and the inherent characteristics vary significantly between countries.
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(NPL) and Distressed Assets – Pakistan’s
Experience (October 1999 – October 2003)
Salman Ali Shaikh
The composition and the inherent characteristics vary significantly
real estate, etc.) are most impacted, geographic concentrations, the
regulatory environment, labour and employment sensitivities, etc.
be done after the above factors have been carefully studied.
been recovered is much too narrow, if your canvas is the whole country
and its socio-economic framework.
basic questions: -
sector, but it also has up-side potential.
the future (post-NPL) economy.
a well-reasoned judgement (sector by sector) on the issue of “sickness
worthy of revival”.
population of over 75%.
went through 3 distinct phases: -
in textiles, sugar, cement, food processing and the public sector. SME
sector not impacted owing to a culture of debt aversion.
(and foreign) banks not impacted. In the public sector banks, much of the
NPL was avoidable, as the country has had relatively high economic growth
throughout (except for a dip in the 1990’s). Major chunk of industry has also
enjoyed protection against foreign competition.
collusive lending, poor corporate governance and a bureaucratic regulatory
system. Kick-back’s (received overseas from machinery suppliers) often
exceeded the paid-up capital of the company. High leverage became the norm.
In the 1990’s many of these companies could not withstand even a minor
Dilettante entrepreneurs. The 1980’s and 1990’s saw the emergence of new
entrants from all walks of life into industry – e.g., agriculturists, bankers,
bureaucrats, military seniors and even judges. Questionable ability to
successfully run an industrial project. These influential individuals
(“the protected species”) constitute a major hurdle for meaningful
reform in the area of NPL.
(emulative) instinct and promoted by the kickback culture. Several large
segments impacted – e.g., cement and food processing. In the latter there
are 51 fruit juice companies and 41 dairy plants – I guess they did not know
about branding as a marketing concept!!! In some industries (e.g., sugar -
owing to low sucrose in the local sugarcane), there is perpetual sickness.
handpicked by politicians and military commanders – key qualification was
the absence of professional competence. These “favours” were repaid in
kind – i.e., by approving sub-standard project financing loans.
Value Maximization: The Basic Imperatives and the Core
The configuration of the country’s NPL not only determines the
choice of tools, but also highlights desirable policy choices and
desired outcomes. In our case, an NPL reduction strategy
(involving value maximization) should have the following features: -
concentrated in manufacturing companies (with modern equipment).
Avoidance of closures was a key issue – once a plant closes down there
can be rapid degeneration, leading to a higher cost of rehabilitation. Banks
(and bankers) who moved fast (in decision-making terms) were able to extract
values ranging from P (Principal) + 25% to P + 50% in the late 1990’s.
Avoidance of “cosmetic” tools. Traditional methods of debt re-scheduling
cause much harm. The company returns to NPL status every 3-4 years and
a myth (that all NPL can be recovered) is perpetuated. There was an urgent need
to devise a methodology for determining the “sustainable debt level” (through
forensic accounting) of projects. With write offs becoming an offence under the
military’s accountability law, bankers played it safe and the use of “cosmetic”
sponsors/management was the main reason for the asset becoming distressed
in the first place. Value maximization required a change of management.
This can only be done if the larger players (i.e., banks and or AMC’s) have the
capability to keep the company running till the new management can be
Creating a (national) scale of priorities. Loan loss reserves were low and
often created by “cosmetic” tools (major re-capitalization of public sector
banks). In this scenario, prioritising industrial segments should be a key
priority. Priority segments (e.g., textiles), which have the capability to
jump-start the national economy, should get a larger share in terms of
resource allocation (e.g., write offs based on sustainable debt calculations).
Conversely, the early demise of segments that are perpetually sick (e.g.,
sugar) should be encouraged through denial of resources.
market. Both banks and borrowers watch these carefully. Regulators should
devise and implement strategy and not waste time in seeking consensus-based
solutions. In Pakistan, we have wasted the better part of a decade by doing
skills in several areas of expertise and specialization – e.g., professional
receivers, auctioneers, administrators, forensic accountants, evaluators
and asset tracing specialists.
economic growth, and decline in fixed investment, increases in military
National Accountability Ordinance leading to the creation of the NAB
(National Accountability Bureau).
equivalent in cash has to be somewhere (e.g., under a mattress) - i.e.,
a genuine business loss is a fiction.
In November 1999, the first batch of industrialists were arrested and subjected
to inhumane treatment.
fresh investment stopped.
areas (debt restructuring and write offs).
coercive means was allowed to continue for over a year.
flows to the existing stock. This can be clearly seen in the chart given below.
$ 3.4 billion (December 31, 1998)
$ 3.9 billion (December 31, 1999)
$ 4.9 billion (December 31, 2000)
$ 5.4 billion (December 31, 2001)
$ 5.1 billion (December 31, 2002)
$ 4.9 billion (June 30, 2003)
the total figure.
asset management company (AMC).
in the financial system.
publishes NPL data regularly.
(non-bank financial institutions – e.g., leasing companies, investment
banks, etc.). SECP does not publish NPL data.
whole is around $ 1 billion higher than the reported figures.
happening according to plan?? When in doubt,
execute a U-turn.
NPL would be drastically reduced. CIRC had not delivered meaningful results.
was also a failure.
somewhat desperate manoeuvre.
make “aggressive” settlements with their defaulting borrowers at values
well below actual debt outstanding and/or the decreed amount through
recovery suits in the court.
Instead of using a balanced yardstick of sustainable debt (going concern
valuation), this directive sets the settlement amount at the fire sale value
(FSV) of the distressed asset.
years earlier) of NPL being inherently recoverable in full and that write offs
were not required.
for such settlements.
negatives, which are as follows: -
This scheme protects all existing managements. It makes it almost impossible
It was designed to complete its business and be wound up by September 2006.
NPL of $ 2.1 billion.
of country’s NPL).
order to improve its performance.
as a lost cause and will let it fade away during the next 2 years.
new corporate rehabilitation law (CRA).
the handling of maximizing value from NPL remains seriously flawed.
This (plus the recent amnesty scheme) is helping to reduce both stock and
flow of NPL.
to restore the balance between debtors and creditors rights and enhance
predictability in the legal process.
and capacity building issues.
its “design” potential.
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
William Butler Yeats (1865-1939)