Non-Performing Asset Recovery Trust (NPART)

The World Bank-IDA FINSAP was a comprehensive and complex reform of Ghana’s financial sector during a period of intense financial distress and macroeconomic imbalances. FINSAP’s package of financial reforms was implemented alongside other World Bank and IMF structural adjustment programs, which aimed to reduce macroeconomic imbalances and liberalize the external sector (World Bank 1997b).

FINSAP was structured in two phases. Under FINSAC I, the bank restructuring component was focused on facilitating the transfer of non-performing assets from distressed banks to NPART. Under FINSAC II, the bank restructuring component was focused on facilitating the disposal of non-performing assets transferred to NPART. The program phases were sequenced: the initial recapitalization and resolution of distressed banks under FINSAC I was a prerequisite for further reforms, such as public divestiture, under FINSAC II.

In the World Bank’s initial FINSAC I proposal, they considered different options to resolve financial deficits and to restore solvency to distressed banks. Examples of considered options include capital injections, debt rescheduling, and “transfer to the Government of non-performing loans to state enterprises and/or guaranteed by Government” (World Bank 1995). Cedi 22.6 billion in loans to public enterprises was removed from bank portfolios under FINSAC I and replaced by claims on the government (World Bank 1997).

The decision to use a public asset management company for the recovery of non-performing assets, as opposed to alternative strategies, was a direct result of technical discussions between the Government, the World Bank IDA, and external independent consultants.

The use of NPART as a public asset management company was authorized by Ghana’s Provisional National Defence Council after the Non-Performing Assets (Loans, Investments) Recovery Trust Law, 1990—Provisional National Defence Council Law 242 (PNDCL 242)— was adopted on February 28, 1990, pursuant to the PNDC Proclamation 1981 (PNDCL 242 1990). The PNDC authorized NPART after recognizing the need to rescue the distressed banks experiencing adverse effects on the credit and investment quality of their portfolios (PNDCL 242 1990). Part I of PNDCL 242 stated the establishment, objectives, and functions of NPART, while Part II established the Non-Performing Assets Recovery Tribunal.

The PNDC gave broad legal powers to NPART such as the authority to exercise powers and actions as it “deems advantageous or necessary for or in connection with the achievement of its mandate” (PNDCL 242 1990). Pursuant to Part III, Section 27 of PNDCL 242, the PNDC Secretary responsible for Finance and Economic Planning could “by legislative instrument make such regulations as may be necessary for the effective and full implementation” of PNDCL 242 (1990). Finally, NPART was exempt from “the payment of all taxes, rates, and duties” (PNDCL 242 1990).

Part II of PNDCL 242 established a special judiciary tribunal called the Non-Performing Assets Recovery Tribunal (the Tribunal) to facilitate NPART’s loan recovery (PNDCL 242 1990). The Tribunal was set up due to Ghana’s weak legal framework for bank resolution, debt recovery, and creditors’ rights, which hampered NPART’s ability to recover value for the Government (Klingebiel 2000). Pursuant to Part II, Section 16 of PNDCL 242, the Tribunal was comprised of a chairman and two other persons. The chairman of the Tribunal was required to be a “judge of the Superior Courts not below the rank of a Justice of the Court of Appeal” or a “person qualified to be appointed to such office” (PNDCL 242 1990). The two remaining positions were to be filled by other persons appointed by the PNDC “in consultation with the Chief Justice” (PNDCL 242 1990).

Part II, Section 17 of PNDCL 242 outlined the Tribunal as having exclusive jurisdiction to hear and determine all matters arising under PNDCL 242 or relating to any non-performing asset transferred to NPART (PNDCL 242 1990). The Tribunal had all the powers of the High Court of Justice in the exercise of its jurisdiction.

Part II, Section 18 of PNDCL 242 also outlined that any judgement or order from the Tribunal, with respect to its legal jurisdiction, was considered final. Any Court entertaining actions or proceedings with the intent to question the Tribunal’s judgements, findings, or rulings was considered unlawful (PNDCL 242 1990). Procedurally, the Tribunal was considered “duly constituted” if the Chairman and “one other member” were present (PNDCL 242 1990). Under Part II, Section 19 of PNDCL 242, decisions of the Tribunal were determined by a majority of the members (PNDCL 242 1990). If convicted, obstructing the Tribunal’s activities resulted in either a “fine not exceeding Cedi 500,000,” “imprisonment for a term not exceeding 12 months,” or to both (PNDCL 242 1990). The Tribunal became operational by October 1992, allowing NPART to initiate liquidation proceedings (World Bank 1997a).

Beyond acting as an asset disposal agency, NPART also assisted FINSAP’s Corporate Restructuring Program. NPART was required to evaluate distressed enterprises and place them into non-viable or potentially viable categories (World Bank 1991). Non-viable enterprises were liquidated or sold by NPART, while potentially viable enterprises (PVEs) were candidates for the CRP. Participation in the CRP was limited to enterprises that were “temporarily experiencing financial distress but with clear medium-term prospects for profitable operation” demonstrated by a specific restructuring proposal (World Bank 1988). NPART’s role in the CRP included facilitating financial work-out arrangements for selected PVEs, with the voluntary participation of Ghanaian banks as follows (World Bank 1991):

1. NPART conducted debt moratoriums, rescheduling, and conversion into subordinated debt.
2. Participating Ghanaian banks extended additional credit and/or injected equity with the expectation that enterprise owners would make their own financial contributions within their capability.

The objective of the CRP was to eventually encourage the private sector to promote the rehabilitation of the PVEs through new venture-capital companies, although this proposal was later rejected (World Bank 1997a).

The PNDCL 242 was notified to the Ghana Gazette on September 21, 1990 (PNDCL 242 1990). Public disclosure requirements under the NPART Operating Polices were relatively limited. Annual audited financial reports were submitted to the Board of Trustees, the Ministry of Finance, the BOG, and the FINSAP Implementation Secretariat (Klingebiel 2000). Additionally, annual reports on NPART’s management were submitted to the Provisional Defense Council for review (PNDCL 242 1990).

NPART’s founding legislation did not describe the capital structure of NPART, but the World Bank (1997) described it as “wholly-owned” by the Ghanaian government. NPART’s first objective was “to hold for and on behalf of the State any non-performing asset of a bank which is transferred to the Trust” (PNDCL 242 1990).

The governing body of NPART, the Board of Trustees, consisted of the following members appointed by the PNDC (PNDCL 242 1990):

• a Chairman;
• representatives from the Ministry of Finance and Economic Planning and the BOG;
• the Chief Administrator of the Trust;
• a chartered accountant from the private sector;
• a lawyer with expertise in corporate law, and;
• three experts.

The Board was responsible for the formulation of policies and the supervision of management of NPART and had the authorization to exercise all legal powers conferred to NPART (PNDCL 242 1990). Under Part I, Section 10 of PNDCL 242, decisions of the Board were determined by a simple majority of members present and voting. During instances of a split vote, the Chairman or the member presiding was entitled to cast the deciding vote.

Moreover, Part I, Section 10 of PNDCL 242 stipulated that any member of the Board that had a conflict of interest, directly or otherwise, in any issues or decisions, was required to disclose in writing the nature of the conflict. The member was barred from any discussion regarding the issue and was also prohibited from voting. Members who failed to disclose a conflict of interest would be removed from the board and on conviction, be liable to a fine less than Cedi 500,000 or imprisonment for less than two years (PNDCL 242 1990).

Part I, Section 13 of PNDCL 242 stated that NPART may “engage” employees, consultants, and advisors as necessary for the function of its mandate, on any terms and conditions that the Board may determine (PNDCL 242 1990). As mentioned previously, the IDA provided extensive technical assistance to support the functions of NPART, including hiring external consultants with previous experience at the US Resolution Trust Corporation (World Bank 1995). Such external advisory support assisted in duties such as “loan classification, asset evaluation and, asset recovery management for NPART” (World Bank 1991).

The World Bank installed an Implementation Secretariat to facilitate the effective and successful implementation of the World Bank-IDA’s FINSAP objectives. The Secretariat was responsible for “providing guidance, oversight, coordination, and monitoring for all activities pertaining” to the FINSAP objectives (World Bank 1991).

The Secretariat was headed by an Executive Director “backed up by a foreign advisor and initially comprised of three sections, each headed by a Section Chief” (World Bank 1991). The sections were: 1) Bank Restructuring and NPART; 2) Corporate Restructuring; and 3) Non-Bank Financial Institutions and Administration and Legal Affairs (World Bank 1991).

While PNDCL 242 did not set a legal limit to the total size of NPART, the Government obviously had fiscal constraints. World Bank implementation reports stated that the book value of NPART’s total portfolio of non-performing assets was about Cedi 50 billion (World Bank 1997b). There was also no legal individual firm participation limit.

About Cedi 47.5 billion in FINSAP bonds were issued by the BOG, set to mature between 2 to 5 years and yielding 7-9% per annum (in many instances, the bonds were rolled over for bonds with interest rates of about 15 percent; World Bank 1994). There is little discussion about these bonds in the years since NPART was established. Moreover, later World Bank reports do not mention the Ghanaian government needing assistance for this debt.

The credit disbursed by the World Bank-IDA provided the funding for technical assistance, staffing, and other operational costs. For example, FINSAC II technical expertise cost estimates were approximately USD 1,080,000 for foreign loan recovery experts and Cedi 32,500,000 for housing (World Bank 1991). Cost estimates were based on the actual cost of hiring two full-time and one part-time external expert for NPART over three years (World Bank 1991).

The tranching of credit disbursed by the World Bank-IDA ensured satisfactory progress in the implementation of the overall FINSAP and in particular, of the bank restructuring (World Bank 1997a). As it relates to NPART, credit disbursements were conditional on the “implementation by NPART of the action program for the recovery of non-performing assets and for liquidation” including meeting the ART timetable (World Bank 1991).

Pursuant to PNDCL 242 (1990), “any bank in Ghana shall at the direction in writing of the [NPART] transfer to the [NPART] such of its non-performing assets.” As such, NPART had broad legal authority to direct banks to transfer non-performing assets. In practice, all of Ghana’s major banks transferred loans to NPART. Though NPLs clustered in seven banks, even the foreign- and privately owned Barclays Bank of Ghana offloaded NPLs to NPART (Antwi-Asare and Addison 2000).

Documents surveyed did not detail the character of NPLs. The World Bank (1991) hinted at the composition of NPART’s portfolio when it blamed government-directed credit allocation and the exchange rate adjustment in 1983 for the country’s NPLs. Some of these policies directed banks to loan to unsustainable public enterprises. In any case, the law left the BOG to determine how non-performing assets would be classified after the government compensated banks for public-enterprise debt (PNDCL 242 1990). Following international regulatory practices, the Bank of Ghana classified non-performing assets in three categories: substandard, doubtful, and loss (World Bank 1995). Non-performing assets were considered eligible for transfer if they were “in existence at the commencement of [PNDCL 242]” or, in existence “as determined by the audited account of the bank on [December 31, 1989], provided that such loans and advances or equity investments were actually on the books of the bank on [June 30, 1987], even if not identified or determined at that time to be non-performing” (PNDCL 242 1990). At the recommendation of the Board, the December 31, 1989, cutoff date for eligibility could be extended by a further period of one year, by “legislative instrument” (PNDCL 242 1990). Klingebiel (2000) said that the eligibility requirements were “nontransparent and vague.”

Under PNDCL 242, NPART could choose which loans to take. Once NPART received NPLs, it split them depending on their private or public status. The banks’ NPLs to state-owned enterprises (SOE) and other Government-guaranteed obligations were removed from banks’ portfolios, transferred to NPART, and offset against government loans, equity, or deposits, with any remaining balances converted into FINSAP bonds (World Bank 1997; Antwi-Asare and Addison 2000). The banks’ NPLs to the private sector were replaced through the issuance of FINSAP bonds by the Bank of Ghana (World Bank 1997a).

The FINSAP bonds issued to the banks provided “for some of these bonds to be discounted at the Bank of Ghana, if liquidity became a problem” (World Bank 1997a). This additional usage of indirect monetary instruments “addressed both the solvency and short-term liquidity needs of affected banks, while also avoiding the risks of high-cost borrowing” (World Bank 1997a). The World Bank (1994) claimed that, had this “swap not occurred and banks were required to make loan-loss provisions according to the [reformed] guidelines, state-owned banks would have continued to show losses and negative net worth.”

Pursuant to PNDCL 242 (1990), the transfer price for the non-performing asset “may be determined by [NPART]” at “such rate; in such form; and subject to such other terms and conditions as [NPART] may determine.” In practice, Klingebiel (2000) says, NPART acquired all non-performing assets at book value excluding accrued interest.

Pursuant to PNDCL 242 (1990), NPART could sell non-performing assets “at the best price realizable” and “take such actions as may be necessary for the recovery of non-performing assets.” NPART was also empowered to “negotiate and reschedule payments of transferred non-performing assets” and finally, “take any other action which is incidental” to NPART’s objectives (PNDCL 242 1990).

In practice, the Government and IDA staff agreed to an action program with a target recovery of non-performing assets and monitorable timetable. The action program set an Aggregate Recovery Target of Cedi 18 billion, compared to a total portfolio of about Cedi 50 billion (World Bank 1995). This was considered realistic based on an account-by-account review of its portfolio by NPART.

The World Bank summarized the action program as follows (World Bank 1991):

1. NPART’s recovery efforts focused on the 250 largest accounts (in excess of Cedi 20 million each) representing 89 percent or Cedi 44.3 billion of the aggregate Cedi 49.5 billion in non-performing assets;
2. NPART screened each account for classification into 4 categories (foreclosure, sale, workout/restructuring, and write-off);
3. Following this classification of each account, NPART assigned a realistic recovery estimate (percentage and amount) to each individual account; and
4. NPART produced the Aggregate Recovery Target (initially estimated at approximately Cedi 18 billion) reviewed by the Government and IDA.

NPART then proceeded to attempt recovery in accordance with Annual Recovery Targets set at 12% in 1991, 22% in 1992, 26% in 1993, 23% in 1994, and the remaining 17% in 1995 (World Bank 1995). The recovery targets themselves were subject to subsequent periodic review and adjustments (World Bank 1991).

NPART’s Operating Policies stipulated that loan recovery “should allow for reasonable work-out arrangements with the debtor” and where work-out arrangements were not feasible, NPART was to “dispose of productive assets on a going concern basis” (Klingebiel 2000). Finally, if sale on a going-concern basis failed or appeared unlikely, the asset would be liquidated (Klingebiel 2000).

NPART’s process of asset sale was through negotiated sales by advertising the “assets subject to foreclosures in the local papers upon which interested buyers approached NPART” (Klingebiel 2000). Purchasers of those assets were “mainly domestic investors and some foreign investors” (Klingebiel 2000).

Pursuant to Part III, Section 29 of PNDCL 242, NPART was authorized on February 28, 1990, as a temporary government entity with a “corporate body” (PNDCL 242 1990). The initial authorization required that NPART should carry out its mandate within a 5-year time frame with a built-in 1-year extension upon the recommendation of the PNDC Secretary and the order of the PNDC (PNDCL 242 1990). However a “slackening in the pace of recovery” in 1995, as well as the “need to wind up residual operations” meant NPART’s mandate was “extended by 18 months” (World Bank 1997b).