Both banks and defaulters have an interest in solving the problem of non-performing loans, but are current measures enough, asks Sherine Abdel-Razek Hardly a day passes without news on debt settlements and on-going negotiations between defaulters and their creditors as the new government seeks to display a more investor- friendly attitude than its predecessors. While senior bankers insist that the local ratio of non- performing loans (NPLs) does not exceed 10 per cent -- less than the accepted world average of 15 per cent -- LE35 billion of failing loans constitute a major problem for the banking sector. Farouk El-Oqda, governor of the Central Bank of Egypt (CBE), said in press statements that the issue of NPLs would be pursued throughout the coming year, with the goal not necessarily being the full repayment of loans but including the rescheduling of debt. Under the CBE's plans individual banks will be able to devise repayment mechanisms acceptable to both the bank and its customers, with the intention of encouraging a nervous banking sector to increase levels of lending. Credit provision has been increasing by only two-three per cent in recent years compared with a 15 per cent average increase in deposits. The most recent step towards resolving the problems caused by borrowers defaulting saw the creation of a joint committee from the Egyptian Federation of Industries and the CBE to arbitrate between local manufacturers and creditors. The committee has 5,000 default cases on its books, including 250 involving sums over LE50 million. Ahmed Atef, head of the new committee and chairman of the Print Section at the Federation of Industries, said that the committee had received appeals from all over the country, and including the public sector, for help in settling problems with creditors. The committee was established following an amendment to Article 133 of the Central Bank law authorising local banks to settle disputes with defaulting clients and annulling court sentences passed against borrowers if they repaid their debts. Egypt's public sector banks remain the most exposed to bad debts so it comes as no surprise that the largest of them, the National Bank of Egypt, should have been the first to launch a loan settlement plan in early 2004. Since then it has reached agreements of LE4.5 billion worth of debt spread over 1,800 customers. The bank also has channelled LE2 billion from non-performing loans provisions as investment in defaulted projects. The spree of debt resettlement and rescheduling began with Ahmed Bahgat whose creditors, in November 2004, accepted his offer to restructure debts of LE2.4 billion in return for withdrawing a court action against him. Bahgat agreed with his creditors that the outstanding debts be converted into equity in the Bahgat Group, while they agreed to inject the investment necessary to turn the group around. It is a formula that former MP and businessman Rami Lakah is pursuing with his largest creditor, Banque du Caire, while one of his companies has already agreed a $5.6 million debt-for-equity swap with HSBC. Avoiding the consequences of court actions, providing working capital to turn around otherwise defunct projects while at the same time repaying the banks -- what could be better? Well, quite a lot according to some analysts. "What is going on now involves re- labelling loans as investments. That deprives the banks from the interest on loans," argues Said Amr Tawfiq, chief financial officer at the Egyptian American Bank (EAB). Atef adds that this re-labelling will ultimately weigh down on the banks' profits . Many bankers take a different view. Lost interest revenue could well be replaced by dividend payments. And faced with the choice of sending a defaulter to jail and writing the debt off as bad, or coming to some accommodation with the defaulting client in order to recoup some of the loan, most banks would opt for the latter, says Said Tareq Amer, a corporate finance and investment banking consultant at the National Bank of Egypt. While banks are free to resettle loans on a case-to-case basis one commonly voiced complaint among debtors is the accumulation of interest. Bankers have so far refused to accept the repayment of the capital of any loan in return for writing off accumulated interest. And in the majority of non-court action settlements banks insist defaulters repay the value of debt in cash rather than assets. Yet requiring defaulters to repay their loans in addition to snowballing compound interest before cancelling court sentence will, says Atef, prove ultimately unfeasible. He recalls the case an LE17 million loan secured seven years ago that, owing to accumulated compound interest rates, has now grown into a LE130 million debt. But, responds NBE's Amer, "a high proportion of interest in overall debt value is a result of the fact that defaulters do not repay their loans". And, he insists, the banks must receive a return on matchmaking between depositors and borrowers and cover the cost of extending credit. One result of the estimated LE35 billion of bad loans dogging the banking sector has been increased caution when extending credit while many banks, in addition, have increased NPL provision. More constructive, though, argues Tawfiq, would be for banks to upgrade their management of credit provision. "Defaulters," he says, "are not the only side of the problem. The banks, too, must accept their share of responsibility. They, after all, extended the loans in the first place." "The problem," says Tawfiq, "is that the auditors who compile the reports on which credit decisions are made are either ex-bankers, who know well how to bury points of weakness in a financial statement so that the company appears credit worthy, or else they are newly graduated and have received auditing licences by virtue of possessing a bachelor of commerce degree."
