By Nkiruka Nnorom
When the Asset Management Corporation of Nigeria (AMCON) was set up in 2010 by the Federal Government through the Central Bank of Nigeria (CBN) to take over the Non-Performing Loans (NPLs) in the banking sector, hopes were high that, finally, respite had come the way of the financial system, and indeed, the economy, over the threats of the huge bad debt (Non Performing Loans) to the economy.
Though the formation was received with mixed feelings among different stakeholders, its mandate of stabilising the banking sector was immediately felt with the take-over of more than N5 trillion loans and injection of fresh funds into the sector.
However, nearly 10 years after the establishment of the bad bank, the excitement that followed its establishment seems to have evaporated due to the inability to successfully put the debt recovery issue to rest.
Having bought those delinquent loans from affected banks at discount, AMCON was supposed to recover those loans within the stipulated time frame and return the same to the government coffers to support the economy.
Concerns are now mounting, and understandably so, as to the justification for establishing AMCON considering the ‘toxic’ impact of the continued delay in recovering those loans to the economy, especially now that the government is faced with dwindling revenue and challenges in executing critical capital projects.
Instead of achieving a reduction in the level of debts, the debts seem to be mounting and have reached N16 trillion.
This is because AMCON has continued to purchase new non-performing loans from banks outside its original mandate.
This excess debt accumulation by the corporation has become a source of concern with the National Assembly (NASS) looking for fresh ways out of the debt mess.
The National Assembly members and other concerned stakeholders are miffed over the fact that the debts are owed by few individuals who exploit the loopholes in the current AMCON Act to evade payment to the detriment of the economy.
Their anger also stemmed from the 0.5 percent annual contribution by banks to AMCON, which many analysts and shareholders believe has continued to create a hole in the banks’ pockets.
Road to AMCON formation
Prior to the establishment of AMCON, the banking sector was reeling in bad debts amounting to over N5 trillion following the 2008/2009 global economic meltdown that severely damaged the banks’ balance sheet positions.
The corporation successfully bought the bad debts at N1.76 trillion, while bonds were issued to settle the banks.
Following its formation, the Corporation identified 10 problem banks posing a systemic threat to the banking industry and responded with the injection of N736 billion liquidity to buy up their assets.
Asset management companies have been used to address the overhang of bad debt in the financial system of countries by expediting corporate restructuring or rapidly disposing of corporate assets.
AMCON was, therefore, established as a special resolution vehicle, designed to remove “toxic” assets from the country’s distressed banking system.
Explaining its responsibility, AMCON said it is saddled with the statutory responsibility, amongst others, of recovering the non-performing loan hitherto disbursed by eligible financial institutions (banks) to their customers.
According to the Act establishing the corporation, AMCON may acquire, hold and dispose of moveable and immovable property as part of measures to facilitate the loan recovery.
State of assets recovery
However, almost 10 years into its operation, AMCON has only recovered a little over N1 trillion of the toxic assets through either asset seizures, forfeiture, or cash payments.
Till date, 350 businessmen and firms still owe the corporation N3.6 trillion, amounting to 81 percent of N4.4 trillion of the total outstanding debts.
According to AMCON, despite numerous overtures and appeals to debtors to settle their indebtedness, some of them have deliberately maintained recalcitrant postures, while also adopting unscrupulous means of avoiding repayment.
Though AMCON said it has continuously appealed and encouraged meaningful dialogue towards the successful resolution of this indebtedness, some of the debtors have failed and or refused to reach a settlement with it using the court.
Following the difficulty in the recovery effort, the senate has passed a Bill, an amendment to the AMCON Act 2014 (No 3) that, amongst others, empowers the corporation to take possession, manage or sell all properties traced to debtors, whether or not such asset or property was used as security/collateral for obtaining the loan in particular.
The Bill also empowers the corporation to access the special tribunal established by the Banks and Other Financial Institutions Act (BOFIA) 2020 for dealing with financial related matters.
Obstacles to the recovery process
Speaking on the challenges impeding the loan recovery efforts of the Corporation, Managing Director/CEO of AMCON, Ahmed Kuru, said: “The instrumentality of the courts” posed huge challenges to the corporation’s debt recovery efforts.
He said: “We are just a government recovery agency saddled with the responsibility of purchasing non-performing loans from banks and ensuring it is paid back using the instrumentality of the law.
“Unfortunately, it did not turn out to be that easy, through the instrumentality of the courts as we encountered a lot of challenges.”
He said that despite two different amendments to the 2010 AMCON Act in 2015 and 2019, the obligors are getting wiser by the day and are deliberately causing orchestrated legal delays knowing that AMCON has a sunset date.
These obligors rather than settle their indebtedness, prefer to rely on technicalities to frustrate the corporation from acting against them.
No end in sight?
Though investment analysts also echoed the same concern as the management of the bad bank, but, they stressed that the challenges go beyond the lengthy court processes and may continue to frustrate the recovery efforts.
According to them, the problem varied from the low quality of the assets bought by AMCON to the over-pricing of the assets and the fact that most of the projects for which the loans were taken are now ‘dead’.
They are, therefore, in doubt of the effectiveness of any new measure the corporation intends to adopt to resolve the problem.
According to Ronak Gadhia, Director, Sub-Saharan Banks, Research, EFG Hermes, the problems to the recovery stemmed from the lengthy and frustrating judicial process in Nigeria as well as the open-endedness of the fund, which has allowed AMCON to continue to purchase non-performing assets from the banking sector (e.g. the purchase of NPLs and recapitalization of Skye Bank) even though it was not intended for this purpose.
He argued that: “The extremely poor quality of assets AMCON acquired in the first place, which is potentially attributable to lack of capacity at the institution when these assets were being acquired”, is also a challenge.
“Specifically, regarding the latter, there is a possibility that due to the inability of AMCON to carry out a proper due diligence process (as the banking sector required rapid relief), many of these assets may have been purchased at unreasonably high fair values,” he added.
Corroborating him, David Adonri, Managing Director/CEO, Highcap Securities, said: “The challenges faced by AMCON in the course of recovering the loans from debtors are numerous.
To begin with, most of the loans were of low quality; they were not really to finance bankable projects.
The canons of lending were also not observed while granting the loans. Most of those loans still reflecting on the books of AMCON are for dead projects. They should actually be considered lost.
“Secondly, some of the debtors are yet to fully recover from the damage caused by the 2008/2009 meltdown and subsequent economic crisis in Nigeria.
“Those who also needed to refinance those bank debts with equity funds have been unable to do so due to inactivity of the primary market for equities since 2008. These categories of debtors are willing to repay but the enabling capital market environment has not just been available to support their performance.
“There is also a category of debtors who are not willing to repay due to the poor credit culture prevalent in Nigeria.
“Finally, due to the weak justice system in Nigeria, AMCON has found it difficult to foreclose on debtors’ assets to wipe out their indebtedness.”
In his own view, Ayodeji Ebo, Head, Retail Investment, at Chapel Hill Denham, said: “The major challenge would be the initial loan agreements executed between the customers and the banks before the takeover by AMCON.
“The inability to enforce the agreements might have hampered the capability of the AMCON to recover the loans.
“This is a herculean task and it may be very difficult to make significant recoveries due to loopholes that might have been in the loan agreements at the point of execution.”
Consequently, the Senate through the Bill it recently passed has allowed for elongation of life of the corporation beyond the initial 10 year tenor which ends this year (December 31, 2021).
The Senate has also empowered the corporation to take over, manage and or sell off all assets traced to the erring debtors, but investment experts have said that this move may not still have much impact.
A dent on the economy
Analysts, who spoke to Vanguard Business Magazine, believe that the outstanding debts AMCON has not been able to recover constitute a big drag on the economy.
“AMCON is carrying against itself trillions of naira of securities (debt instruments) it issued to settle the banks.
“There is no doubt that the measure helped in rescuing most banks, but the resultant public debt is inimical to the financial stability of the government.
“The money that the government ought to apply in developing the economy is tied down in that debt,” said David Adonri.
For Ronak Gadhia, the continued delay in recovery of the debts impacts negatively on the economy in three ways.
He said: “Continued payments by banks to AMCON of 0.5% of their total assets reduces the profitability of banks and therefore means banks are generating much lower internal capital, which then reduces banks capacity to lend.
“The lower profitability of the banking sector as a result of AMCON payments reduces their attractiveness to foreign portfolio investors, thereby limiting Foreign Exchange (FX) inflows to Nigeria.
“Continued poor performance rate from AMCON also creates significant liquidity challenges for the CBN as the latter owns the majority of the bonds issued by the bad bank.”
Agreeing with them, Ayodeji Ebo, said that the debts constitute weight on the CBN’s balance sheet.
“The restructuring of the loans were done on the balance sheet of the CBN, hence the more success achieved in this respect will improve the CBN’s balance sheet position,” he enthused.
Facing the hard truth
In view of the difficulties in recovering these loans, investment experts have now advised the government/AMCON to consider some of those loans as lost and stop quoting the original figure as the outstanding debt.
In the words of Adonri of Higcap Securities, “Most of those loans are actually lost. They are not recoverable. It is imperative on AMCON to be realistic and stop quoting the original figures as the outstanding loans.
“For those without means of repayment, nothing can be done. In the banking business, the risk of loss of credit is well understood.
“Those that cannot be recovered are prudentially provided for.”
He said there is the need for many of those bad loans to be written off, while AMCON concentrates its efforts on the performing loans or those that have the capacity to perform.
Gadhia of EFG Hermes underscored the importance of government intervention, saying that the government had to step in to bail out systemic issues of the banking sector in other countries where similar problems existed.
“In Nigeria, the CBN was hoping to avoid injection of significant taxpayers’ money into the banking system by creating AMCON.
“However, given that AMCON has largely failed to do so, I believe the federal government has to accept it as a liability and swap the AMCON bonds with federal government bonds. As these things stand, the CBN is AMCON’s primary creditor and thus AMCON bonds are considered as a quasi-government liability anyway.”
Ebo of Chapel Hill Denham said there is need to fortify AMCON with more powers to recover the loans once it has been fully proven that the amount is owed.
He said that the ability to shorten the litigation period will also go a long way to hasten the process.
He argued that though the amendment Bill may aid and increase the pace of recovery, it will not fully address the challenges of recovery.
Adonri noted that AMCON’s assignment would not be said to have been concluded as long as the problem of non-performing loans, which the bad bank was saddled with the responsibility to address remains.
It, therefore, needs more time to bring the lingering issues to a firm conclusion, he said.
Speaking in the same vein, Ronak Gadhia of EFG Hermes, insisted that any legislation that speeds up recovery of bad debts (not just within AMCON but the wider banking sector as well) would be a positive development as it would reduce credit risk in the economy.
“Having said that, I do not think the Bill before the Senate will effectively resolve the AMCON’s issues because I believe a large number of loans may have been acquired at significantly above fair value, thus achieving a full or high enough recovery on these assets may not be possible.”