||**Table 16 (cont.). Approaches to Ba**|**d Asset Recove**|
|---|---|---|
||**Centralized**|**Decentralized**|
|**Kazakhstan**|**Rehabilitation Agency**(1994-present) took<br>over loans of largest insolvent debtors (mostly<br>mining and metallurgical enterprises);<br>**Agricultural Support Fund**(1994-present)<br>took over agricultural credits;<br>**Exim Bank (I**994-present) took over most of<br>the outstanding trade-related loans that carried<br>govemment guarantees.|In 1998 the government gave a mandate to a special<br>enterprise restructuring agency to provide**creditor-**<br>led**restructuring**if the farrn or enterprise is viable<br>and has developed a restructuring plan.|
|**Kyrgyz Republic**|**DEBR4 (Debt Restructuring**Agency) (1996-<br>present) was established with the mandate to<br>perform receivership function for liquidated<br>banks.<br>**Kyrgyz Agricultural Finance Corporation**<br>(1997-present) was launched to take over bad<br>debts of the agricultural sector.|The government encouraged commercial banks to<br>create work-out units for pursuing collection of<br>loans to small and medium enterprises. No<br>information was available to the authors on the<br>performance of these work-out units.|
|**Ukraine**|Bank Recovery Unit (BRU) was created at the<br>Bank Supervision Department of the central<br>bank in late 1996 to identify private banks for<br>restructuring or liquidation. No information was<br>available to the authors about the scope and<br>outcome of bank/assets restructuring activities<br>of the BRU.|Work-out units were created at three large former<br>state owned banks to pursue loan recovery.|

Appropriate incentives are important for the collection of bad debts regardless of the approach adopted for bad debt recovery. Similarly, effective collateral, foreclosure and bankruptcy laws are necessary for enabling either debt collection agencies or banks to take control of insolvent enterprises and proceed with their restructuring or liquidation. Finally, the presence of political will to impose hard budget constraints on enterprises is also necessary to ensure that insolvent enterprises are either liquidated or have no access to new financing. The following discusses the bad debt recovery experiences of the countries under consideration in light of these factors.

# a. **Centralized Approach**

The countries under consideration set up three types of centralized agencies for bad debt recovery: asset management companies, bank liquidation agencies and special divisions within a central bank to manage bank liquidation and/or asset recovery. AMCs were created in the _Czech Republic_ (where it was referred to as an "asset hospital"), and in _Lithuania, Kazakhstan_ and _Macedonia._ In Hungary, a separate division of the development bank performed the asset recovery function. The _Kyrgyz Republic, Georgia_ and _Uj'kraine_ all set up bank recovery units in their central banks. Asset Management Companies in all the countries covered in the study, and in the transition economies in general, are typically state-owned<sup>38</sup> . This has some negative implications in light of the above-mentioned factors that are important for successful bad debt recovery.

(i) It is generally more difficult to structure incentives for active loan recovery by a state-owned centralized agency. By contrast, under the decentralized approach, banks are provided the incentives to recover bad loans as they retain at least some (and sometimes all) of the recovered debt.

The experience of the _Czech Republic_ illustrates the importance of having appropriate incentives for loan recovery. The _Czech_ govemment has introduced perverse incentives for bad debt recovery in two

**38** In international practice AMCs are also typically state owned, although there are some examples of privately owned AMCs. One such example is the Japanese Cooperative Credit Purchasing Company, which was "established by Japanese banks to buy non-performing loans from individual banks at market price." Source: Andrew Sheng (1996).

40