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Unlocking Sri Lanka’s Credit Markets The Case for a National Asset Management Company

This article was compiled by Professor Udara Peiris.

Udara Peiris joined Oberlin in the fall of 2022. He was previously a tenured Associate Professor of Finance at HSE University (at the department ICEF) in Russia and has taught at the University of Warwick, and the University of Oxford (both in the UK). He was a research advisor to the Central Bank of Russia, consulted the Government of Sri Lanka, and presented his research at institutions including the IMF, Federal Reserve System, Bank of England, and Reserve Bank of Australia. His research has a strong policy focus and covers the nexus between the macroeconomy and the financial markets.

Sri Lanka’s banking sector faces a paradox: despite ample liquidity, with banks’ liquid assets nearly doubling to 35.25% of total assets, credit growth remains stagnant due to high levels of non-performing loans (NPLs). The Central Bank’s recent proposal to restructure SME loans, while welcome, addresses only a fragment of the problem. What Sri Lanka needs is a comprehensive solution: a public-private Asset Management Company (AMC) to resolve crisis-era NPLs. This approach has proven successful across Europe and Asia. Rather than being taxpayer support for banks, or a “bailout”, an AMC can serve to create hitherto non-existent markets in the trade of NPLs. In doing so, the taxpayer and the economy at large can reap the benefits.

AMCs operate as an independently managed Special Purpose Vehicle (SPV), financed by a combination of private and public funds.  The AMC would acquire and professionally manage non-performing loans purchased from banks, freeing their balance sheets for new lending. This centralized approach offers distinct advantages over the current system of fragmented negotiations between individual banks and borrowers.

The timing for such intervention is critical. While the Central Bank of Sri Lanka’s current loan restructuring initiatives provide valuable immediate relief, they don’t address fundamental barriers to credit growth. The recent lifting of import restrictions creates new monetary policy pressures, forcing the central bank to choose between raising rates to protect the rupee or accepting currency depreciation. With government bond yields remaining above 10%, this high-interest environment threatens to further constrain economic recovery, making systematic NPL resolution increasingly urgent.

An AMC would offer several distinct advantages:

  • Systematic Resolution: Replace case-by-case restructuring with comprehensive solutions
  • Specialised Focus: Create an institution dedicated solely to asset resolution
  • Private Sector Engagement: Attract external expertise and capital
  • Clean Slate: Separate historical problems from future lending decisions

Learning from Success Elsewhere

Several countries have successfully used Asset Management Companies (AMCs) to stabilize financial crises. Sweden’s Securum effectively managed distressed assets in the 1990s, ensuring transparency and independence while recovering over 90% of asset value. South Korea’s KAMCO purchased and resold nonperforming loans (NPLs), reducing the banking sector’s NPL ratio from 17% to below 3% within a decade and actually recouping about 123% of what it spent to acquire those NPLs. Malaysia’s Danaharta achieved a 58% recovery rate by being granted extrajudicial powers to fast-track loan resolution. Ireland’s NAMA stabilized its banking sector post-2008, managing €74 billion in distressed assets with a structured liquidation plan, and has already resulted in a net surplus/profit. These AMCs succeeded due to strong legal frameworks, political backing, and commercial focus. 

A different approach was China’s four AMCs—Cinda, Huarong, China Orient, and Great Wall—which were established in 1999 to absorb $500 billion in NPLs from state banks,  and reduced the banking system’s NPL ratio from over 30% to below 2% by 2006. Their success came from government support, diversified asset disposal strategies, and later privatization to enhance efficiency. Thailand’s Thai Asset Management Corporation (TAMC), created after the Asian financial crisis, resolved over 70% of acquired distressed assets through aggressive debt restructuring and asset bundling, helping to cut the financial sector’s NPL ratio from 47% to under 10% within five years. Its success stemmed from its legal authority to override creditor disputes and its focus on corporate rather than consumer debt, maximizing recovery rates.

To be effective in Sri Lanka’s context, the AMC should be built on four foundational principles:

  • Comprehensive Coverage: The mandate must extend beyond SMEs to include state-owned enterprise debt.
  • Public-Private Partnership: Harness private sector expertise while maintaining public oversight.
  • Market-Based Resolution: Focus on maximising recovery values through systematic approaches.
  • Strong Legal Framework: Ensure transparent, efficient operations.

One approach would be to create the legal and regulatory environment for the private sector to establish an AMC on its own, thereby allowing them to mutualise the risks of the NPLs. Another approach would be to establish it together with strong state backing, with a view to generate profits to the tax-payer over the medium term. In both approaches, banks would be encouraged to recognise losses on their NPLs and stimulate lending to new productive ventures.

The Path Forward

Sri Lanka stands at a defining moment. An AMC can transform temporary relief into lasting reform. If established with strong legal and commercial principles, it can generate profits for the taxpayer, and reduce risks and increase capacity in the banking sector. By establishing an AMC now, we can unlock our banking sector’s full potential and lay the groundwork for sustainable economic growth. The choice is between accepting prolonged credit stagnation or embracing a comprehensive solution that addresses the root cause of our lending slowdown.

Link to the original article published on the Daily Mirror Column.
Unlocking Sri Lanka’s Credit Markets The Case for a National Asset Management Company - Opinion | Daily Mirror

 

2025-03-03
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