By emma okenyi

As the Asset Management Company of Nigeria (AMCON) sets to go into operation any time from now, the pertinent questions asked by experts in financial matters are that does the company seek to maximize value or bail out the banks?

What actually according to them are the main reason for setting up AMCON, was it created to use an independent centralized company to transfer non-performing loans from the commercial banks and maximum value and cash recovery through asset disposal and liquidation over a period of time not to exceed five years or created to transfer non-performing loans of the 10 sick banks that are not desired by potential buyers off their books to make them more marketable and valuable to investors?

The Central Bank of Nigeria (CBN )has said in one of its releases that AMCON is a vehicle for recapitalizing the banks. It was created since July 19th 2010, when the president, Dr Goodluck Jonathan signed the bill setting it up. It is important for us to know where the operators of the company are headed, what actions to take factoring in local dynamics to ensure that it serves the purpose of its formation which is to improve bank solvency and profitability, restart growth of credit to the private sector; banks refocusing on making fresh non-governmental loans and recovery of non-performing loans which will boost the economy and improve corporate profitability and avoidance of repeated systemic financial distress in the banking industry and banks failure by participants in the AMCON purchase of non-performing loans.

The purported amount of non-performing loans in the country’s banking sector is put at N2.2trillion; N1.5trillion of the amount is said to emanate from the 8 sanctioned and 2 reprimanded banks. The total amount of non-performing loans is approximately 22 percent of Nigeria’s gross domestic products in 2009. The amount of purported funding, that is assets to be transferred for AMCON is N1.5trillion, 15 percent of Nigeria’s GDP and 11 percent of the country’s banking industry assets amounting to N14 trillion. The level of the non performing loans is put at 33 percent of the banking system loans according to the CBN. These figures clearly points out the magnitude of the banking crisis in Nigeria and the daunting task ahead of AMCON to help improve the solvency of some of the banks. The resolution costs will exceed 21percent of Nigeria’s 2009 GDP once all is said and done. Resolution costs can escalate if self interests and government interference override the over arching objective that brought AMCON into existence.

This makes it important to analyze AMCON so far to decipher whether it is being set up to act as a business or a charity to the private sector of the Nigerian economy. A corporation that requires funding that is equivalent to 33percent of Nigeria’s initial budget for 2010 should not act as a charity body in any manner whatsoever. The company must take actions that signal that the banks are not being bailed out but resuscitated and that AMCON intends to maximize value while at it. AMCON should not act out as an arbiter and messiah at the same time.

It is best to itemize the structure of success for an asset management company while factoring in the idiosyncrasies that apply to Nigeria. Success is a journey not a destination and how the journey will be embarked upon impacts when you get to your destination and how you feel when you get to your destination.

Ownership and control of AMCON must be fully separated; management must be independent and there must be no iota of political interference. In addition, there must be no transfer of politically connected or fraudulent assets to the company.

AMCON should have a narrow objective; resolving insolvent and unviable financial institutions and selling off the collateral attached to their non performing loans. The company should not get involved in restructuring as this will distract and complicate its original mandate. In addition, restructuring often requires new lending; the company will therefore need the capacity to lend coupled with the required funding in excess of the N1.5 trillion currently being sourced to purchase impaired assets.

AMCON must have a strong legal framework in place that does not shield debtors especially, the politically exposed and connected ones. Adequate bankruptcy and foreclosure laws must be in place prior to beginning of its operations.

Adequate funding must be provided to the company from inception; this is very likely not going to be the case as the N1.5 trillion will be provided over a ten year period. A company that continues goes back to its owners and sponsors for funding will find it difficult not to compromise its objectives while sacrificing the independence that goes to the heart of its relevance.

All bank losses arising from the sale of non-performing loans to AMCON must be fully recognized in the income statement in the year of sale in addition to the necessary balance sheet adjustments. The premise of bank losses is built on the expectations that the non performing loans will be bought at a discount to book value given that they are impaired assets.

There must be no inflated pricing of impaired assets; every non performing loan sold to AMCON must accept a haircut on principal. Again the asset company must act with a business mentality and not a savior mentality. It should be geared towards providing a service to banks while processing a private sector business mentality despite the company being government owned. Both sides must accept a certain level of risk, without this, the moral hazard scenario will likely come to the fore.

It is hoped that the losses incurred by the banks on sale of non performing loans to the asset company are important enough to prevent moral hazard in the future lending behavior of banks that will perpetuate the cycle of irresponsible lending and self aggrandizement that have been witnessed in the past. Objective transfer pricing is key. Transfer pricing of assets must be based stringently on the heavily discounted collateral value of loans and not the degree of capital inadequacy of the bank in question. As the banks are now shareholders in AMCON, the moral hazard risk is now front and center.

Impaired asset selection criteria should not be based on bank’s recapitalization needs but on an objective quality assessment of the loan. There should be no place for emotional patronage in business.
Strongly, it is advocated that for Bond call options to be given to the banks in exchange for their assets. AMCON will issue zero coupon Bonds to the banks in exchange from their impaired assets. No consideration has exchanged hands for the transfer of impaired assets. Certainly, this will change the face of banking in the country and will not be easy times for operators in the banking system as they will constantly be under the watchful eyes of the regulators more especially following the abuse of corporate governance by some chief executives of banks that necessitated their removal last year.

Governor of the Central Bank of Nigeria (CBN), Mallam Sanusi Lamido Sanusi, has warned that there will be no hiding place for bank debtors as the Assets Management Corporation of Nigeria (AMCON) will employ all legal means to retrieve monies owed banks to forestall further deterioration of the system.

Sanusi did admit recently in Benin at a seminar for business editors that he did not know of the huge level of rot in the banking system, apparently reacting to the issue of debtors who cause distress in banks walking the streets free, insisting that this can no longer be tolerated in the face of the present dispensation.

A total sum of N300 billion has been recovered from debtors between last year and now, maintaining that AMCON would take any legal means to ensure total recovery of the debts.

The CBN boss posited that AMCON being a government institution has the necessary power in the Act setting it up, to go after the debtors, warning those concerned not to waste any further time in paying up to avoid the sledge hammer.

Sanusi was of the view that all the money injected in the troubled 10 banks would be repaid as the CBN had to ensure that the banks have adequate liquidity level to remain afloat.

This, he added would engender confidence in the sector as well as enhance growth through encouraging fresh investments into the sector.

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