The New Nation - Internet Edition

Fahim Salek

The Financial world has gone through a severe shakeout due to the severity of the Recession & is still on going. Though the economic experts have predicted the recovery of the economies in near time to come, but still there is insignificant hint of that. Economies all over the world has been highly affected by the recession specially the developed ones resulting in job layoffs, import-export discrepancies, bankruptcies, global unemployment & equity market crashes. However, we all are reaping the burden of such anomalies of the world economy.

Whom can we blame when we saw it coming? Rather I should put it the other way round i.e. taking calculated financial risks by the financial institution bosses & their ambitions to grow quick resulting in catastrophe when the calculations proved to be wrong.

Amongst other factors, the term that can be blamed first for these consequences is the notion of 'Credit Market'. When 'Northern Rock', a British bank plummeted due to subprime mortgage crisis near the end of 2007 along with 'Lehmann Brothers' in America which was a financial services firm; this was all due to the trouble in the 'credit market'.

It all started from there & since then the markets began to tumble resulting in the collapse of colossal banks, financial institutions, industries & equity markets. We are quite awake of this big picture regarding the global economic turndown, but quite remarkably miss the concept of 'Unregulated Credit' and its atrocity.

The perception of 'Toxic Assets' root from the cost of unregulated credit in the financial markets; are assets for which there are no buyers, and as a result, no clear value.

These assets do not reflect the real cost & become a burden for the organization. In plain words or which might be of more relevance, if a bank sanctions a loan to someone retaining some assets as security; but after a period of time the market price of the assets deteriorate & the person becomes unable to payoff the loan & the interest, the assets held as security becomes illiquid & the bank will only be able to recover a portion of their money back through the process of acquiring & selling these assets. Eventually, the receivables in the banks books get transformed to 'Toxic Assets' from 'Assets'. In this global economic crisis, toxic assets became an issue of major concern.

It was this unregulated credit sanctions that made the banks & financial institutions globally victims of the Recession. Sanctioning loans & offering credits without proper & thorough credit checks worked as a catalyst for such stipulation.

Nevertheless, banks and financial organizations are the heart of financial world.

Their consistency is so important that their business relies heavily on trust, which has a tendency to evaporate in such unsound situations and in extreme cases the organization would soon be left scrambling for cash.

If the government loses faith, the organizations might not have a business worth saving. This leads to nationalization & take over which has been the way out to several cases around the world. But the curse of the toxic assets remains.

The biggest losers, of course, are shareholders, who get wiped out as creditors take the equity in the new company.

If we have a glance at Bangladesh, it might be a blow for us to know that the government banks have exempted interests of three thousand six hundred & forty four crore BDT in the last eight years especially Sonali bank & Agrani bank of Bangladesh.

Truly, we are not lagging behind from rest of the world in such respect. This amount has surely been written off the books or categorized as toxic assets. It would be futile discussing the nitty-gritty of such an issue which has already been exempted.

Since the world financial markets began to tumble in 2008, governments around the world have spent almost $11 trillion bailing out failing banks and trying to repair the financial system of which $ 3.6 trillion spent in the US, $ 2.4 trillion spent in the UK, $ 3.2 trillion spent in the other rich nations and $ 1.6 trillion spent in China & other emerging nations.

We have been quite fortunate that, even during the recession none of our banks went broke or was struggling severely that needed to be nationalized or bailed out. But the matter to regret is that the interests out of the sanctioned loans in the past might not be ever recovered which is a colossal loss for our economy.

Neither have we been heavily industrialized which could have compensated for such a loss nor has it enhanced our GDP. We have already got heavy international debt on us & the taxpayers money is never close to be adequate to repay that & this debt on our country is growing every year.

Under such circumstances, it is dismal for the banks to write off or categorize this big chunk of money into toxic assets. To eradicate and address credit problems as such, the banks need to strictly renegotiate the terms of loan facilities but at the same time help keep the credit flowing securely which is inevitable for investments.