Catalog

	Table of Contents
p. 24 of 32 BACK | NEXT I. Introduction II. Assessment of Past Performance III. Rationale and Role IV. Operational Strategy V. Operational Improvements A. Single Project Exposure Limit B. Providing for Smaller Interventions C. Conflicts of Interest D. Screening of Projects E. Streamlining of Business Processes F. Strengthened Risk Management G. Strengthened Management of Nonperforming Investments H. Private Sector Operations at Resident Missions I. Enhancing Technical Assistance for Private Sector Operations J. Active Outreach Marketing K. Establishment of a Financial Reporting System VI. Resource Requirements VII. Conclusions and Recommendations

Private Sector Operations: Strategic Directions and Review : V. Operational Improvements

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G. Strengthened Management of Nonperforming Investments

95. In pursuing—and hopefully, maximizing—recovery of nonperforming investments, fast action is often needed. Distressed companies typically have severe liquidity problems and face the threat of involuntary bankruptcy action by creditors pursuing remedies outside ADB’s control. To maximize recoveries, timely decisions and smooth implementation are required in ADB’s intensive negotiations with colenders, sponsors, and strategic partners.

96. The management of impaired assets is a normal part of banking, and of PSO. To maximize recoveries, it must be subject to a technical specialized decision-making process. Currently, the President approves decisions on exercise of creditors’ remedies, including foreclosure, and all restructuring proposals currently require Board approval. This lengthy approval process for restructuring differs from good practices in other MDBs⁶⁴ and has, on several occasions, prevented ADB from responding promptly to crisis situations or from taking the lead to carry out recovery operations whose twin aims are to protect ADB’s interests and to recover outstanding amounts owed to ADB. Maximum recovery has suffered as a result.

97. Approval for loan restructuring should be streamlined as follows: where the proposed restructuring of a private sector loan involves no additional funding (“no new money”) from ADB and only involves revisions and amendments of the existing financing arrangements⁶⁵ and where all other alternatives to the proposed restructuring are less attractive to ADB’s interests, the proposed restructuring may be approved by the President, and reported to the Board. All restructuring proposals involving new money will be submitted to the Board for approval on a “no objection” basis in line with the existing practice.

98. Investment recovery operations inevitably entail costs in order to protect mortgaged assets. These costs are often expended by lenders or investors but ultimately accrue to the account of the borrower. Examples include paying for (i) security personnel, caretakers, engineers, management staff of defaulting borrowers, and professionals, such as accountants and lawyers; and (ii) insurance coverage. The outlay of reasonable amounts of money for safeguarding operations or assets of companies in liquidation or restructuring is consistent with sound banking principles under Article 14(xiv) of the ADB Charter. Currently, the Board must approve all funding for outlays related to investment recovery. Because investment recovery operations to protect ADB’s interests as a secured lender require swift decisions, ADB’s failure to respond in a timely manner could impair the value of assets held as security. Thus, it is proposed that authority be delegated to the President for the use of funds from ADB’s ordinary capital resources (OCR) up to a cumulative amount of $2 million to promptly finance costs and expenses related to investment recovery operations where the outlay improves the prospects of recovery and the borrower cannot currently cover such expenses.⁶⁶ The actual use of such funds will be reported to the Board quarterly. ADB will claim any amount disbursed for these expenses as part of the moneys owed to and recoverable by ADB under the original investment and security arrangements⁶⁷ and the amount so disbursed will be subject to loss provisioning. ADB will also clarify the status of such claims as part of the workout process. To the extent permitted by law, ADB will also claim a “super-priority” for such amounts. Recoveries will be credited against expenditures, allowing the earmarked funds to be used on a revolving basis.

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