AMCs in South East Asia

In general terms, an AMC is an institution established to acquire, manage and recover non-performing assets of troubled or failed financial institutions. In most cases, a government wishing to restore stability and efficiency in the financial sector while at the same time attempting to keep fiscal costs and risk of moral hazard at a minimum has set up AMCs.

Following Cooke and Foley (2000), it is possible to identify three different institutional set-ups that can be used when introducing AMCs in a financial sector:

• A centralised state-owned AMC.

• Several decentralised AMCs operating as separate departments within each crisis-stricken institution.

• Several decentralised AMCs as separate legal entities but each one addressing the particular problems of one of the crisis-stricken institutions.

While no blueprint exists regarding which of the three types of AMC set-ups to employ to a given set of circumstances, Cooke and Foley suggest that the first option, a centralised AMC is to be preferred when the NPL problem is of a systemic magnitude and/or when special legal powers or purpose tailored legislation are needed to override the judicial branch. In addition, Cooke and Foley stress that a central AMC will be the preferred option if the human capital and specialist skills necessary to operate an AMC are in limited supply in the financial sector.

After the financial crisis in 1997-1998, the directly affected East Asian countries were burdened with a large volume of non-performing assets, including nonperforming or past due loans and real estate and other assets pledged as collateral for loans. The magnitude of the problem in the respective countries is evident from Table 5.8. As is the case in Vietnam, several of the depicted countries are thought to have employed a definition of NPLs, which is more lenient than recommended by international standards.

Table 5.8: NPLs in South East Asia in peak year of crisis, 1998

In their policy response to this problem and with the intent to restore the health of and confidence in the financial sector, all countries chose to create and develop AMCs in 1997-1998. As can be seen from Table 5.9 most countries have chosen to employ a centralised AMC set-up.

Table 5.9: AMC set-up in South East Asia

Initial model Chosen Approach

Asset Management Company acts as bidder of

Table 5.9: AMC set-up in South East Asia

Initial model Chosen Approach

last resort for FRA’s bad assets.

Radhanasin Bank²⁹ acts as bidder for FRA’s good assets.

Bank Based Asset Management Companies work out NPLs for commercial banks (both private and state).

Indonesia Decentral Indonesian Bank Restructuring Agency supervises banks in need of restructuring and manages assets acquired in the bank restructuring process.

Malaysia Central Special purpose vehicle for the management and disposition of banking system NPLs

Korea Central Special purpose vehicle for the management and disposition of banking system nonperforming assets.

Source: Cooke and Foley (2000)

According to Rajan and Bird (2001) all of the above mentioned economies have made

‘some headway in reducing NPLs’. In Korea and Malaysia the combined effect of the nascent economic recovery and the AMC effort have caused a reduction in NPL ratios for commercial banks to less than 10 percent. In contrast, NPLs have remained high in Thailand (about 30 percent), a fact that Rajan and Bird cautiously attribute to the Thai government’s preference for a market-based approach to financial restructuring. In Indonesia, the central AMC is estimated to control approximately 75 percent of total NPLs, but the combination of powerful, uncooperative borrowers and an inadequate legislative framework continue to hamper the subsequent recovery and restructuring of assets.

29Radhanasin Bank (RAB) was initially created to manage quality assets of the failed finance companies, leaving the bad assets to the AMC. In January 1998, however, the government announced that RAB would no longer serve in this capacity but instead act as a commercial bank.

In their 2000 survey of AMCs in East Asia, Cooke and Foley assess individual country experience using AMCs and distil valuable lessons from the first years of AMC in South East Asia. While identifying problems and hurdles in all countries studied, Cooke and Foley specifically note, that the decentralised approach chosen in Thailand is not without problems. To be more specific, the bank based AMCs did not appear to be guiding and coordinating their efforts to resolve the country’s NPL problems. Still plagued by a high level of non-performing loans, the Thai government in February 2001 finally decided to establish a nationwide AMC with broad special powers to resolve the critical situation of the banking sector.

Regardless of whether a centralised or decentralised approach is chosen, Cooke and Foley point to the following key lessons, which should also be considered in a Vietnamese context:

1. Addressing the NPL problem is not equivalent to addressing the factors responsible for creating the problem in the first place. Failure to address the causes of the NPL problems is to invite a repetition. A realistic assessment of the cause, size and character of the problem is the key starting point for attempts to address the NPL problems.

2. Prior to establishing the AMC, the government must assess the legal infrastructure. Among other things this implies ensuring that the legal system and legal powers are in place to permit an effective and swift case management and that bankruptcy, tax, property ownership, collateral and foreclosure laws are both adequate and reflected in court rulings. If the legal infrastructure appears inadequate measures must be taken to bestow the AMCs with the necessary special legal powers and/or legislation.

3. The use of AMCs and the issue of resolving NPLs is a complex matter, and the government should consider establishing an independent supervisory board responsible for the balanced, non-partisan oversight of the efforts and results. The board should have both industry and government representatives. It should not be directly involved in the daily operations.

Related to the above-mentioned complexity of the process of establishing and operating an AMC the government should make sure that policies and institutions are developed to promote openness and transparency in the process. Lack of transparency can result in a conflict of interest, or the appearance thereof, which can diminish public confidence in the integrity of the process.