BY JONAH NWOKPOKU
Stakeholders in the financial sector have raised questions over the effectiveness and success recorded by the Asset Management Corporation of Nigeria, AMCON in its debt recovery efforts since it was set up in 2009. They also argued among other things, against the Act increasing the lifespan of the corporation and AMCON’s increasing role of assuming non-performing loans.
Dr. Biodun Adedipe, a financial expert, said since AMCON was established to stabilize the financial system by restoring confidence in the financial services sector following the financial crisis, it has become imperative to appraise its impact on the nation’s economy.
Delivering a paper entitled: The impact of AMCON on the Nigerian economy, at a symposium organised recently by Bank Directors Association of Nigeria, BDAN in Lagos, he said that AMCON’s debt is a contingent liability to the government, since AMCON’s bonds are backed by the Federal Government of Nigeria (FGN), which implies that in the event of a default, the government will have to settle AMCON’s creditors. In that case, the Federal Government would issue bonds to refinance AMCON’s debt, making AMCON’s debt a “contingent” liability to the government.
He explained that, “Given the country’s increasing debt stock, a default by AMCON on its debt obligations will exert more pressure on Federal Government finances. If the government defaults, this will adversely affect investor confidence on Nigeria’s bond market.
“Nigeria’s fiscal framework is characterized by deficit budgets, high infrastructure deficit, high dependence on crude oil, low level of non-oil exports and low non-oil revenue, unmet debt obligations of AMCON that need refinancing will threaten government’s fiscal operations. At inception, AMCON’s debt is the equivalent of 56.53 per cent of national debt of N10.04 trillion as at December 2013.In reality, gross national debt should include AMCON’s outstanding, and that is huge risk and a threat to sustainable growth.”
On AMCON’s lifespan which was increased by another 10 years by the National Assembly recently, he noted that, “An AMCON continuing in operation in perpetuity is great inefficiency and a waste of taxpayers’ funds, as it will continue to incur high carrying cost from high operational costs as well as from the erosion in the value of assets not disposed and restructured over time. The other worry here is the ‘moral hazard’ whereby continuing existence of AMCON would send a wrong signal to the banks to book loans that can always be sold to AMCON if the loans become deficient.”
He further noted that, “A poorly designed and implemented exit strategy for AMCON can be injurious to the economy. AMCON’s outstanding credit estimated at N3.9 trillion is about 4.86 per cent of Nigeria’s rebased GDP at N80.22 trillion, and this could be a source of macroeconomic instability and influence adversely, Nigeria’s subsequent sovereign ratings. A downgrade of the country will not augur well for the newly acquired status of ‘frontier economy.’
He further added that, “The proposal for the AMCON Amendment Act 2013 to make the banks bear the cost of intervention is an aberration that, when properly interpreted, means simply that AMCON bought over NPLs at a discount (banks took the loss on that) and negotiated restructuring terms that possibly included interest (and perhaps principal) forgiveness with the ‘bad debtors’, and will now make the banks contribute to the Sinking Fund that will pay the cost of AMCON’s intervention. The summary is that the borrowers in question ended up getting away with whatever discount AMCON obtained from the banks and the discount they subsequently obtained from AMCON! There is no successful ‘bad bank’ model that worked with this arrangement!”
He recommended that if AMCON is to successfully deliver its mandate, it must have a well defined lifespan.
“AMCON was conceived to operate for 10 years, but the enabling Act gave it life in perpetual succession. This is a departure from global best practices and should be a key issue in the ongoing effort at amendment of its Act. The only distress resolution asset management company that has continuing life is NAMA of Ireland whose mandate is completely wider in scope than that of AMCON,” he said.
He said AMCON should pursue a clear mandate and that since its mandate on the types of assets to be acquired and resolution methods are clear to some extent, it should not engage in running a business taken over, except perhaps such business is placed on receivership.
He said: “AMCON doesn’t seem to have its mandate defined in terms of clear, time-bound metrics that indicate the percentage resolutions over specific time periods. Such targets should aim at volumes in absolute and relative terms for disposal of the acquired assets. As well, there should be an end-term target cost of resolution that is either linked to the value invested in NPL acquisition by AMCON or as percentage of GDP. This should apply also to return on investments made by AMCON. That is the only way to measure the efficiency and effectiveness of the ‘bad bank’ crisis resolution model.
On the Sinking Fund, he said, “Continuing contribution of banks to this fund is an aberration that brings back almost the entire cost of intervention back on the banks. He added that, “The AMCON Act needs amendment that the National Assembly should expedite action on in order to achieve quicker resolution and higher recoveries. More bite given to AMCON will enable the corporation prosecute recalcitrant borrowers who have the attitude that bank loans are shares of the national cake.”
He said, “As structured today and as it operates, AMCON cannot deliver its mandate effectively and efficiently, and that will vitiate the impact it is expected to have on the banking industry on the one hand, and the national economy on the other.”
However, in a swift reaction, AMCON’s chief Executive Officer, Mr. Mustafa Chike-Obi who was also present at the event, said operations of the corporation have not drained public funds and that it intends to pay whatever money it had borrowed.
According to him, “It is not correct that there has been N3.17 trillion of tax payers’ money injected into the banking system. So far, tax payers’ money that has been paid into the banking system is N10bn. The rest of the money is funds that we have borrowed and we intend to pay back. So it is premature to say that N3.17 trillion has been injected into the banks.”
On how long AMCON should exist, he said, “The impression that asset management corporations all over the world ended their operations within a certain period of time is misleading. I need to point out that the scope of the Nigerian banking crisis was bigger in terms of GDP than any of the countries that had combated financial crisis through an asset management company. Nigeria is the biggest case where you have the biggest airline in trouble, eight of the 10 largest manufacturers in trouble, many of the petroleum companies in trouble, many of the banks in trouble and the scope of the problem would not be addressed in the same way you would address a localised real estate problem.”
On the corporation’s debt, Chike-Obi said, “AMCON has guarantees which cannot be considered as debt by any standard. He mentioned that AMCON’s debt is equivalent of 56 per cent of national GDP. At this point, let me say that we have had discussions with several agencies in the world. America for example has $1.3 trillion of public debt and about $18 trillion of guarantees. Guarantees are not considered anywhere in the world as part of public debt except where there is no clear path for repayment. So, in the case of AMCON where we have shown the regulatory agencies the clear path to repayment, it is not considered as public debt. We have had discussions and all written agencies including IMF have agreed that AMCON’s liabilities should not be part of the GDP.”
He further explained that, “the plan for AMCON is 10 years for now. In 2023, we expect AMCON to be a very small entity. The reason why we said 10 years and not five years is because for example, we hold about N300 billion of public stocks and the average trading volume is five billion a day. So if you must sell it at the average of 2.5 billion a day, it will take many years to sell all the shares. So we take longer time frame so that we can dispose of these shares.
“The same thing goes with aircraft, airlines, manufacturing companies, tank farms. I think we are in possession of 80 per cent of tank farm capacity and any attempt to dispose of them in any rash manner, will lead to the exact crisis you are trying to solve. So we do not plan for perpetuity, we plan for 10 years and we hope that by then AMCON will remain a very small entity that may be domiciled at NDIC or somewhere else so that it will be better for future crises.”
On whether AMCON’s debts and lifespan constitute a moral hazard, he argued that, “for a bank to sell any loan to AMCON means the bank has to take the provision, it has to take the huge loss, and the average purchase price is about 40 per cent of the cost of loan. I don’t know of any banker, who has made the loan and says because AMCON is there, I am going to make the loan where I am going to make 60 per cent. The issue of moral hazards does not arise because AMCON prices very diligently.
Additionally, the issue of how long AMCON would remain is not a moral hazard; the issue is how efficiently it will dispose of what it has.”
He said that “the banks’ bearing of the cost of the loan is the nicest thing Nigeria has done and I think that the world has been emulating them. The beneficiaries of AMCON are the banks.
The banks, even before the tight monetary policies and the CBN Cash Reserve Ratio and other regulations, were making profits. I will challenge any bank that was doing better before AMCON and is now being penalised by paying 50 basis points to come up and show me the numbers. I think it is a responsible thing for the beneficiaries of the intervention to pay for it. This is also to make the banks realise that in case of any future occurrence, it would be borne by them.”
On his part, the president of BDAN, Olorogun (Dr.) Sonny Kuku said it was imperative that AMCON’s performance is being appraised since the aim of setting it up in the first place was to stabilise the economy which was on the brink of total collapse.
He said: “If you look at the Nigerian economy, it has been centered on financial institutions, and the financial institutions drive the economy. The intervention of the CBN was crucial and a major instrument that the CBN used to stabilise the economy was AMCON. So it is imperative that after five years, the effect of AMCON on the economy should be reviewed. It is a very delicate subject because if after today we had found out that AMCON failed, it means that a lot of thinking that went to it was faulty. But as we have seen today, it is an entirely different story and this is to say that at least, one aspect of government has done very well. You see, as bank directors, we were directly affected and if those loans were not taken off our books, we will still be struggling today to try and fulfill our obligations.”
On AMCON’s 0.5 per cent interest rates that shareholders are conteding, he said, “You cannot eat your cake and have it. This is because if AMCON had not come in, those shareholders wouldn’t have any money today. So what AMCON is doing is to make the banks themselves pay for being rescued. I can tell you that all the banks were rescued but some were rescued more than others. Some were forced to clean their balance sheets; fortunately, they had enough assets to be able to clean their balance sheets so they were not on the rescue list.
“Some did not have enough assets; they had negative balance sheets. There is hardly any bank that will say it went scot-free. That 0.5 per cent which is as long as AMCON exists is like paying insurance for a major illness that would have killed you. So the shareholders should understand that it is a very small price to pay. In any case, 0.5 per cent of assets of banks, is very small and shareholders are paid money based on their equity and it’s like 10 per cent of the total assets of the banks.
“Is it in any way affecting the profits that banks are declaring? Yes of course, what is taken should affect the profits of the banks but you can see that banks are declaring more and more profits despite that and they are able to do that because the enabling environment has been put in place by the CBN and the NDIC and the AMCON who are making available the stabilizing instruments.“
He noted that even though “the National Assembly has approved that AMCON will go on for another 10 years, we must realise that they are not going to be buying more liabilities. They are going to just spend the time winding down, selling off all these bad loans until they can sell as much as possible. They said their target is 80 per cent but if they achieve 50, 60 per cent, they have done very well compared to other asset management companies all over the world.”
He added that, “AMCON bought the debts at at very low prices. For instance, if they bought a debt from you that has no collateral, they only bought it for 5 per cent, so even if they don’t sell it, they wouldn’t lose more than 5 per cent but sometimes they can sell it for 100 per cent or 10 per cent or 15 per cent, which is why they are achieving 112 per cent. So they might be able to achieve 80 per cent but what has really happened is that they bought it at very low prices and they are trying to achieve certain levels for high prices.
So in the end really, if it’s well managed, AMCON would have done very well. And whoever brought the idea has done a good job.